SEC Form PRER14C filed by Shell Midstream Partners L.P.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14C

SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of the

Securities Exchange Act of 1934

(Amendment No. 1)

 

 

Check the appropriate box:

 

☒	Preliminary Information Statement

 

☐	Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))

 

☐	Definitive Information Statement

Shell Midstream Partners, L.P.

(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

 

☐	No fee required

 

☒	Fee paid previously with preliminary materials.

 

☐	Fee computed on table in exhibit required by Item 25(b) of Schedule 14A (17 CFR 240.14a-101) per Item 1 of this Schedule and Exchange Act Rules 14c-5(g) and 0-11.

 

 

 

PRELIMINARY COPY—SUBJECT TO COMPLETION

 

 

150 N. Dairy Ashford Rd.

Houston, Texas 77079

NOTICE OF ACTION BY WRITTEN CONSENT

AND INFORMATION STATEMENT

WE ARE NOT ASKING YOU FOR A PROXY AND

YOU ARE REQUESTED NOT TO SEND US A PROXY

To the Common Unitholders of Shell Midstream Partners, L.P.:

This notice of action by written consent and the accompanying information statement are being furnished to the holders (the “Common Unitholders”) of common units representing limited partner interests (“Common Units”) in Shell Midstream Partners, L.P., a Delaware limited partnership (the “Partnership”), in connection with the Agreement and Plan of Merger, dated as of July 25, 2022 (as it may be amended from time to time, the “Merger Agreement”), entered into by and among Shell USA, Inc., a Delaware corporation (“Parent”), Shell Midstream LP Holdings LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of Parent (“Holdings”), Semisonic Enterprises LLC, a Delaware limited liability company and indirect wholly owned subsidiary of Parent (“Merger Sub”), the Partnership and Shell Midstream Partners GP LLC, a Delaware limited liability company and the general partner of the Partnership (the “General Partner”), pursuant to which, among other things, and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Partnership, with the Partnership surviving the merger and continuing to exist as a Delaware limited partnership (the “Merger”).

If the Merger is completed, you will be entitled to receive (i) $15.85 in cash, without interest, less any applicable withholding taxes, for each Common Unit you own and (ii) any distribution in respect of the Common Units with a record date occurring prior to the effective time of the Merger (the “Effective Time”) that may have been declared by the Partnership on the Common Units in accordance with the terms of the Merger Agreement and the Partnership Agreement (as defined below) and which remains unpaid at the Effective Time.

The conflicts committee (the “Conflicts Committee”) of the board of directors of the General Partner (the “GP Board”), consisting solely of individuals that satisfied the independence and other requirements for membership on the Conflicts Committee that are set forth in the Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of April 1, 2020 (the “Partnership Agreement”), at a meeting duly called and held on July 25, 2022, unanimously (a) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including holders of Common Units other than Parent, Holdings, the General Partner and their respective affiliates (the “Public Unitholders”), (b) approved the Merger Agreement and the transactions contemplated thereby, including the Merger (the foregoing constituting “Special Approval” for all purposes of the Partnership Agreement, including Section 7.10(a) thereof), (c) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on the terms and subject to the conditions set forth in the Merger Agreement, and (d) recommended that the GP Board (1) direct that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the limited partners of

the Partnership (the “Limited Partners”) for approval pursuant to Section 14.3 of the Partnership Agreement and (2) authorize the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement.

Upon receipt of the recommendation of the Conflicts Committee (and the approval of the General Partner’s sole member), and following discussion regarding, among other things, the Conflicts Committee’s receipt of a fairness opinion of Intrepid Partners, LLC, the terms of the transaction documents and their negotiation by the various parties, including in-house counsel for the Partnership, the terms of comparable recent master limited partnership buy-in transactions, and the process undertaken by the Conflicts Committee in connection with the Merger, at a meeting duly called and held on July 25, 2022, the GP Board unanimously (a) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are (1) fair and reasonable to the Public Unitholders and (2) in the best interests of the Partnership, including the Public Unitholders, (b) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, (c) approved the execution, delivery and performance of the Merger Agreement and the transactions contemplated thereby, including the Merger, and (d) directed that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement, recommended approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by the Limited Partners and authorized the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement.

On July 25, 2022, Parent caused Holdings, which beneficially owns 269,457,304 Common Units and 50,782,904 Series A perpetual convertible preferred units, collectively representing approximately 72% of the voting power of the Partnership’s outstanding limited partner interests, to deliver, concurrently with the execution of the Merger Agreement, a written consent (the “Written Consent”) approving the Merger Agreement and the transactions contemplated thereby, including the Merger. The delivery of the Written Consent is sufficient to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on behalf of the Limited Partners. As a result, the Partnership has not solicited and is not soliciting your approval of the Merger Agreement or the Merger. Further, the Partnership does not intend to call a meeting of Limited Partners for purposes of voting on the approval of the Merger Agreement or the Merger.

The accompanying information statement provides you with detailed information about the Merger Agreement and the Merger. A copy of the Merger Agreement is attached as Annex A to the accompanying information statement. You are encouraged to read the entire information statement, including the Merger Agreement and the documents incorporated by reference in the information statement, carefully. Please read “Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the Merger. You may also obtain additional information about the Partnership from documents the Partnership has filed with the Securities and Exchange Commission.

No action by you is requested or required at this time. If the Merger is consummated, you will receive any relevant instructions regarding the surrender of, and payment for, your Common Units.

The accompanying information statement is dated                 , 2022, and is first being mailed to Common Unitholders on or about                , 2022.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

TABLE OF CONTENTS

 

		Page
SUMMARY TERM SHEET			1
Parties to the Merger			1
Relationship of the Parties to the Merger			2
The Merger			3
The Merger Consideration			3
Effects of the Merger			4
Action by Written Consent			4
The Conflicts Committee and GP Board Recommendations and Reasons for the Merger			4
Position of the Shell Filing Parties as to the Fairness of the Merger			6
Opinion of Financial Advisor to the Conflicts Committee			6
Interests of the Directors and Executive Officers of the General Partner in the Merger			6
Regulatory Approvals Required for the Merger			6
Conditions to Completion of the Merger			7
Termination of the Merger Agreement			7
Effect of Termination; Termination Expenses			8
Financing of the Merger			9
Expenses Relating to the Merger			9
Material U.S. Federal Income Tax Consequences of the Merger			9
No Appraisal Rights			10
Accounting Treatment			10
Delisting and Deregistration of Common Units			10
QUESTIONS AND ANSWERS ABOUT THE MERGER			11
SPECIAL FACTORS			15
Effects of the Merger			15
Background of the Merger			16
Resolutions of Conflicts of Interest; Standards of Conduct and Modification of Duties			24
Reasons for Approval of the Merger Agreement and the Merger by the Conflicts Committee and the GP Board			25
Unaudited Financial Projections of the Partnership			33
Opinion of Financial Advisor to the Conflicts Committee			37
Position of the Shell Filing Parties as to the Fairness of the Merger			47
Purposes and Reasons of the Shell Filing Parties for the Merger			49
Primary Benefits and Detriments of the Merger			51
Interests of the Directors and Executive Officers of the General Partner in the Merger			52
Material U.S. Federal Income Tax Consequences of the Merger			52
Ownership of the Partnership After the Merger			53
Regulatory Approvals and Clearances Required for the Merger			53
Financing of the Merger			53
Fees and Expenses			53
Certain Legal Matters			54
Provisions for Public Unitholders			54
Delisting and Deregistration of Common Units			54
No Appraisal Rights			54
Accounting Treatment of the Merger			54
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			55
OTHER MATTERS			56
Householding of Materials			56

 

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		Page
THE MERGER AGREEMENT			57
The Merger			57
Effective Time; Closing			58
Conditions to Completion of the Merger			58
The Merger Consideration			60
Representations and Warranties			60
Conduct of Business Prior to Closing			62
Agreement to Take Further Action and to Use Reasonable Best Efforts			63
Conflicts Committee			64
Access to Information			64
Indemnification and Insurance			64
Certain Tax Matters			64
Withholding			65
Adjustments to Prevent Dilution			65
Termination of Trading and Deregistration			65
Section 16 Matters			65
Other Covenants and Agreements			65
Termination of the Merger Agreement			66
Effect of Termination; Termination Expenses			67
Amendment and Supplement; Waiver			67
Assignment			67
Specific Performance			67
Action by the Partnership or the General Partner			68
Performance by the General Partner			68
Governing Law			68
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER			69
Tax Consequences of the Merger to Common Unitholders			70
INFORMATION CONCERNING THE PARTNERSHIP			72
About the Partnership			72
Business and Background of Natural Persons Related to the Partnership			72
COMMON UNIT MARKET PRICE AND DISTRIBUTION INFORMATION			78
Common Unit Market Price Information			78
Distribution Information			78
INFORMATION CONCERNING THE SHELL FILING PARTIES			80
UNIT OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF THE SHELL FILING PARTIES			82
Unit Ownership by the General Partner’s Directors and Executive Officers			82
Unit Ownership by Parent’s Directors and Executive Officers			83
Unit Ownership of Five Percent or More Common Unitholders			83
CERTAIN PURCHASES AND SALES OF COMMON UNITS			84
DELISTING AND DEREGISTRATION OF COMMON UNITS			84
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE			84
WHERE YOU CAN FIND MORE INFORMATION			84

ANNEX A: AGREEMENT AND PLAN OF MERGER

ANNEX B: OPINION OF INTREPID PARTNERS, LLC

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Set forth below are questions that you, as a Public Unitholder, may have regarding the Merger and the Merger Agreement, and brief answers to those questions. You are urged to read carefully this information statement and the other documents referred to in this information statement in their entirety, including the Merger Agreement, which is attached as Annex A to this information statement, and Intrepid’s opinion, which is attached as Annex B to this information statement, and the documents incorporated by reference into this information statement, because this section may not provide all of the information that is important to you with respect to the Merger and the Merger Agreement. You may obtain a list of the documents incorporated by reference into this information statement in the section titled “Where You Can Find More Information.”

 

Q:	Why am I receiving these materials?

 

A:

The Partnership and the General Partner, together with Parent, Holdings and Merger Sub, have agreed to a merger, pursuant to which Merger Sub will merge with and into the Partnership, with the Partnership surviving as an indirect wholly owned subsidiary of Parent. After the Merger, the Common Units will cease to be publicly traded. This information statement describes the Merger, and the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by Written Consent of Holdings. The GP Board is providing this information statement to you pursuant to Section 14(c) of the Exchange Act solely to inform you of, and provide you with information about, the Merger Agreement and the transactions contemplated thereby, including the Merger, before the Merger is consummated. This information statement is first being mailed to Common Unitholders on or about             , 2022.

 

Q:	Why am I not being asked to vote on the Merger?

 

A:

Consummation of the Merger requires approval of a “Unit Majority” of the Limited Partners, which means at least a majority of the outstanding Common Units and outstanding Preferred Units, with such Preferred Units to be treated as Common Units on an “as if” converted basis, voting together as a single class. Holdings owns approximately 72% of the voting power of the Partnership’s outstanding limited partner interests, a sufficient number to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on behalf of the Limited Partners. Concurrently with the execution of the Merger Agreement, Holdings delivered the Written Consent approving the Merger Agreement and the transactions contemplated thereby, including the Merger. As a result, the Partnership has not solicited and is not soliciting your approval of the Merger Agreement or the Merger, and does not intend to call a meeting of the Limited Partners to approve the Merger Agreement or the transactions contemplated thereby, including the Merger. See “The Merger Agreement—Conditions to Completion of the Merger.”

 

Q:	What will happen in the Merger?

 

A:

In the Merger, Merger Sub will merge with and into the Partnership. The Partnership will survive as an indirect wholly owned subsidiary of Parent. If the Merger is completed, the Common Units will cease to be listed on the NYSE, will be deregistered under the Exchange Act, and will cease to be publicly traded. See “Special Factors—Effects of the Merger.”

 

Q:	What will I, as a Common Unitholder, receive if the Merger is completed?

 

A:

Upon completion of the Merger, you will be entitled to receive (i) $15.85 per Common Unit in cash, without interest, less any applicable withholding taxes, and (ii) any distribution in respect of the Common Units with a record date occurring prior to the Effective Time that may have been declared by the Partnership on the Common Units in accordance with the terms of the Merger Agreement and the Partnership Agreement and which remains unpaid at the Effective Time. See “The Merger Agreement—Conditions to Completion of the Merger.”

 

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Q:	Will the Partnership continue to pay quarterly distributions?

 

A:

During the period from July 25, 2022, the date of the Merger Agreement, until consummation of the Merger, if permitted by applicable law and in accordance with the terms and conditions in the Partnership Agreement, the General Partner will cause the Partnership to declare and pay regular quarterly cash distributions to the Common Unitholders consistent with past practice. In no event will any regular quarterly cash distribution declared or paid by Partnership to the Common Unitholders and the holders of the Preferred Units be less than $0.300 per Common Unit and $0.2363 per Preferred Unit, respectively. See “The Merger Agreement.”

 

Q:	How does the $15.85 per Common Unit Merger Consideration compare to the market price of the Common Units prior to the execution of the Merger Agreement?

 

A:

The $15.85 per Common Unit Merger Consideration represents an approximate 25% premium to the trailing 30-day volume-weighted average price (“VWAP”) of the Common Units as of February 10, 2022 (the last trading day prior to the time that Parent offered to acquire all of the Public Common Units), an approximate 23% premium to the closing price of the Common Units on February 10, 2022, and an approximate 13% premium to the trailing 30-day VWAP of the Common Units as of July 22, 2022 (the last trading day prior to the Conflicts Committee’s approval of the Merger). See “Common Unit Market Price and Distribution Information—Common Unit Market Price Information.”

 

Q:	Did the Conflicts Committee approve the Merger Agreement and the Merger?

 

A:

Yes. The Conflicts Committee, consisting of the three directors who meet the independence and other qualifications set forth in the Partnership Agreement for membership on the Conflicts Committee, unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including the Public Unitholders; (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger (the foregoing constituting “Special Approval” for all purposes of the Partnership Agreement, including Section 7.10(a) thereof); (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on the terms and subject to the conditions set forth in the Merger Agreement; and (iv) recommended that the GP Board (A) direct that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement and (B) authorize the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement. See “Special Factors—Reasons for Approval of the Merger Agreement and the Merger by the Conflicts Committee and the GP Board—Reasons for the Conflicts Committee’s Approval” beginning on page 26 of this information statement.

 

Q:	Did the GP Board recommend that the Limited Partners approve the Merger Agreement and the Merger?

 

A:

Yes, the GP Board unanimously (a) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are (1) fair and reasonable to the Public Unitholders and (2) in the best interests of the Partnership, including the Public Unitholders, (b) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, (c) approved the execution, delivery and performance of the Merger Agreement and the transactions contemplated thereby, including the Merger, and (d) directed that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement, recommended approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by the Limited Partners and authorized the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement. See “Special Factors—Reasons for Approval of the Merger Agreement and the Merger by the Conflicts Committee and the GP Board—Reasons for the GP Board’s Recommendation” beginning on page 30 of this information statement.

 

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Q:	When do you expect the Merger to be completed?

 

A:

Parent and the Partnership expect the Merger will close as soon as possible following the satisfaction of the closing conditions to the Merger described in this information statement, which the parties expect to occur in the fourth quarter of 2022. See “The Merger Agreement—Effective Time; Closing.”

 

Q:	What if the Merger is not completed?

 

A:

If the Merger is not completed because the closing conditions are not satisfied or waived, you will not receive any form of consideration for your Common Units in connection with the Merger. Instead, the Partnership will remain a publicly traded master limited partnership, and the Common Units will continue to be listed and traded on the NYSE.

 

Q:	What conditions must be satisfied to complete the Merger?

 

A:

Parent and the Partnership are not required to complete the Merger unless a number of customary conditions are satisfied or waived. For a more complete summary of the conditions that must be satisfied or waived prior to the completion of the Merger, see “The Merger Agreement—Conditions to Completion of the Merger.”

 

Q:	What do I need to do now?

 

A:	No action by you is requested or required at this time. If the Merger is consummated, you will receive any relevant instructions regarding the surrender of, and payment of the Merger Consideration for, your Common Units. See “The Merger Agreement—The Merger Consideration.”

 

Q:	What happens if I sell my Common Units before the Effective Time?

 

A:	If you transfer your Common Units before the Effective Time, you will transfer the right to receive the per unit Merger Consideration, if the Merger is consummated, to the person to whom you transfer your Common Units. See “The Merger Agreement—The Merger Consideration.”

 

Q:	How will I receive the per unit Merger Consideration to which I am entitled?

 

A:

Promptly after the Effective Time, the Paying Agent will mail or provide to each Public Unitholder of record certain transmittal materials and instructions for use in effecting the surrender of Common Units to the Paying Agent. The Partnership does not have certificated Common Units as of the date of this information statement. As such, your Common Units are held in “street name” through a bank, brokerage firm or other nominee, and you should contact your bank, brokerage firm or other nominee for instructions as to how to effect the surrender of your “street name” Common Units in exchange for the per unit Merger Consideration. In the event that unit certificates are issued to you after the date of this information statement, please do not send such certificates to the Paying Agent until you receive the transmittal materials and instructions for use in effecting the surrender of Common Units to the Paying Agent. See “The Merger Agreement—The Merger Consideration.”

 

Q:	Am I entitled to appraisal or dissenters’ rights?

 

A:	No. Common Unitholders are not entitled to dissenters’ rights of appraisal under the Partnership Agreement, the Merger Agreement or applicable Delaware law. See “Special Factors—No Appraisal Rights.”

 

Q:	What are the expected U.S. federal income tax consequences to Common Unitholders as a result of the Merger?

 

A:	If you are a U.S. Common Unitholder (as defined in the section titled “Material U.S. Federal Income Tax Consequences of the Merger”), the receipt of cash in exchange for Common Units pursuant to the Merger

 

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will be a taxable transaction for U.S. federal income tax purposes and the resulting tax liability, if any, will depend on your particular situation. In general, gain or loss recognized on the receipt of cash in exchange for Common Units will be taxable as capital gain or loss, a portion of which will be separately computed and taxed as ordinary income or loss under the Code. Accordingly, you should consult your tax advisors regarding the particular tax consequences to you of the exchange of Common Units for cash pursuant to the Merger in the light of your particular circumstances (including the application and effect of any state, local or foreign income and other tax laws). See “Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of certain U.S. federal income tax consequences of the Merger.

 

Q:	What is “householding”?

 

A:

The Partnership has adopted a procedure approved by the SEC called “householding.” Under this procedure, Common Unitholders who have the same address and have consented to the Partnership’s mailing of proxy materials and other unitholder information only to one account in such household will receive only one paper copy of this information statement, unless one or more of these Common Unitholders notifies the Partnership that they wish to continue receiving individual copies. This procedure helps reduce the Partnership’s printing costs and postage fees.

A number of brokerage firms with account holders who are Common Unitholders may also use householding. Once you have received notice from your bank or broker that it will be householding materials to your address, householding generally will continue until you are notified otherwise or until you revoke your consent.

If, at any time, you no longer wish to participate in “householding” and you prefer to receive separate materials, please notify your broker or write to the following address:

SHELL MIDSTREAM PARTNERS, L.P.

150 N. Dairy Ashford Rd.

Houston, Texas 77079

Attention: Investor Relations

Phone: (832) 337-2837

For further discussion of householding matters, see “Other Matters—Householding of Materials.”

 

Q:	Who can help answer my questions?

 

A:	If you have any questions about the Merger or need additional copies of this information statement, you should contact the Partnership at the above address and phone number.

 

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SPECIAL FACTORS

This section of the information statement describes the material aspects of the proposed Merger. This section may not contain all of the information that is important to you. You should carefully read this entire information statement and the documents incorporated herein by reference, including the full text of the Merger Agreement and Intrepid’s opinion for a more complete understanding of the Merger. Copies of the Merger Agreement and Intrepid’s opinion are attached hereto as Annex A and Annex B, respectively. In addition, important business and financial information about the Partnership is included in or incorporated into this information statement by reference. See “Where You Can Find More Information.”

Effects of the Merger

Pursuant to the Merger Agreement, Merger Sub, an indirect wholly owned subsidiary of Parent, will merge with and into the Partnership, with the Partnership surviving the Merger and continuing to exist as a Delaware limited partnership, and each Public Common Unit will be converted into the right to receive the Merger Consideration. If the Merger is completed, (i) the Public Unitholders will no longer have an equity interest in the Partnership, (ii) the Common Units will no longer be listed on the NYSE, (iii) the Common Units will be deregistered under the Exchange Act as promptly as practicable following the Effective Time and (iv) Parent, as the parent of Holdings, the General Partner and Merger Sub, will indirectly own all of the limited partner interests and the non-economic general partner interest in the Partnership.

The limited liability company interests in Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into a number of Common Units in the Partnership as the surviving entity in the Merger equal to the number of Public Common Units converted into the right to receive Merger Consideration. At the Effective Time, the books and records of the Partnership will be revised to reflect (i) the conversion and cancellation of all Public Common Units and the right to receive the Merger Consideration, (ii) the conversion of the limited liability company interests in Merger Sub and that, immediately after the Effective Time, Holdings and SOPC West will be the only holders of Common Units and Limited Partners and (iii) the continuation of the existence of the Partnership without dissolution.

The (i) non-economic general partner interest, (ii) the Common Units held by Parent and its affiliates and (iii) the Preferred Units, each as are issued and outstanding immediately prior to the Effective Time will not be cancelled, will not be converted into, or entitle the holder thereof to receive, Merger Consideration and will remain outstanding as equity interests in the Partnership as the surviving entity in the Merger.

As a result and upon consummation of the Merger, the Partnership will cease to be a publicly traded partnership and the Common Units will no longer be traded on the NYSE. The Public Unitholders will no longer have any interest in the Partnership’s future earnings or growth. The Merger will have the federal tax consequences described under “Material U.S. Federal Income Tax Consequences of the Merger.”

The Partnership’s net book value (calculated as total assets minus total liabilities) as of June 30, 2022 was approximately $(441) million, and the Partnership’s net income attributable to the Partnership for the six months ended June 30, 2022 was approximately $306 million. Based on their ownership in the Partnership on an as-converted basis, the Shell Filing Parties’ aggregate beneficial interest in the Partnership’s net book value as of June 30, 2022 was approximately 72% (approximately $(318) million) and the Shell Filing Parties’ aggregate beneficial interest in the Partnership’s net income attributable to the Partnership for the six months ended June 30, 2022 was approximately 72% (approximately $221 million). If the Merger is consummated, the Shell Filing Parties’ aggregate beneficial interest in the Partnership’s net book value and net income attributable to the Partnership each will increase to 100%. Accordingly, if the Merger is consummated, the Shell Filing Parties’ aggregate beneficial interest in the Partnership’s net book value and net income attributable to the Partnership will increase to approximately $(441) million and approximately $306 million, respectively (based on the Partnership’s June 30, 2022 financial data). Parent and its affiliates will also be entitled to any future increase in the Partnership’s value and all income generated by the Partnership’s operations going forward.

 

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Background of the Merger

Parent and its management regularly review operational and strategic opportunities to increase value for Shell’s investors. Likewise, since its formation and initial public offering, the Partnership has executed a strategy to increase value for its investors. In connection with these reviews, the parties have, from time to time, evaluated potential transactions that would further their respective strategic objectives.

Parent and its controlled affiliates formed the Partnership to serve as a growth vehicle for Shell’s midstream business by accessing public capital markets. Following the Partnership’s initial public offering in 2014, Parent and its affiliates engaged in a number of dropdown transactions through April 2020 to support the Partnership’s growth strategy. These transactions, along with the restructuring discussed below, were funded by a combination of cash raised by borrowings from credit facilities with Parent and its affiliates, public issuances of Common Units by the Partnership and the direct issuance by the Partnership of Common Units and the Preferred Units to Parent and its affiliates. Additionally, as part of its efforts to support the Partnership’s growth strategy and to lower its cost of capital, Parent and its affiliates agreed to waive payments totaling $130 million with respect to the Partnership’s incentive distribution rights and Common Units beginning in 2019 and, concurrently with the April 2020 dropdown transaction, completed a restructuring that eliminated the Partnership’s incentive distribution rights and the General Partner’s economic general partner interest. In May 2021, an affiliate of Parent also engaged in a transaction with the Partnership in which certain assets of the Partnership were exchanged for Parent’s remaining interests in Zydeco Pipeline Company LLC.

In recent years, Parent has from time to time considered the environment for MLPs generally, and for the Partnership specifically, including the reduced accessibility of equity capital markets for MLPs, which limited the ability of MLPs to fund acquisitions using additional equity issuances; the increasing cost of capital for MLPs, even for MLPs that had already eliminated their incentive distribution rights; the increased desire of investors for companies legally structured as traditional corporations for governance and liquidity reasons; the passage of the Tax Cuts and Jobs Act of 2017, which lowered the U.S. federal corporate income tax rate from 35% to 21% and thereby reduced the relative tax benefits of the MLP pass-through structure; and rising interest rates and inflationary pressures and the perceived effects of such market dynamics on the trading prices for the Common Units. These market trends have led to numerous transactions involving MLPs, including buy-ins of MLPs by their corporate sponsors, acquisitions of MLPs by third parties, conversions of MLPs to corporations for income tax purposes and simplifications of MLPs in which incentive distribution rights are modified or eliminated to improve an MLP’s cost of capital. The overall result of these transactions, combined with a lack of initial public offerings by MLPs in recent years, has been a significant reduction in the number of outstanding MLPs.

As a result of these considerations and in the light of the uncertainty surrounding the early phases of the COVID-19 pandemic, in March 2020 Parent began to explore the feasibility of acquiring the Partnership either through a negotiated merger or by utilizing the limited call right included in the Partnership Agreement, which would allow Parent to acquire the outstanding Public Common Units at a specified price once it owned 75% of the total outstanding Common Units. In exploring such a transaction, Parent considered various options to reach the 75% threshold required to exercise the limited call right. Parent ultimately decided against pursuing a transaction with respect to the Partnership at that time due to the continuing uncertain effects of the COVID-19 pandemic and overall market conditions on Shell and the Partnership. No such potential transaction was discussed with either management of the General Partner or the GP Board.

Management of Parent and its affiliates continued to monitor the Partnership’s performance and the market for MLPs generally throughout the remainder of 2020 and 2021. Performance of the Common Units continued to decline during this period, and the Partnership decreased its distribution for the quarter ended June 30, 2021. In January 2022, Parent again began actively considering potential options with respect to its investment in the Partnership and engaged Baker Botts L.L.P. (“Baker Botts”) and Richards, Layton & Finger, P.A. (“RLF”) to serve as its counsel in connection with a potential buy-in transaction. Parent also engaged Barclays Capital Inc. (“Barclays”) on February 8, 2022, to serve as its financial advisor. Following initial discussions with its advisors, on February 4, 2022, Parent management sought and received organizational approval to pursue a potential

 

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acquisition of the Public Common Units using cash consideration from Parent. Shell determined not to issue its own equity as consideration in a potential transaction, which would have been inconsistent with its announced share repurchase goals. Following this approval, Parent management and its advisors prepared to submit an initial cash proposal to the Partnership. On February 9, 2022, Parent discussed with Evercore Group L.L.C. (“Evercore”) the possibility of serving as a financial advisor to Parent in connection with the potential transaction. Parent subsequently engaged Evercore on March 17, 2022, to serve as its financial advisor alongside Barclays.

On February 10, 2022, representatives of Parent alerted the Chief Executive Officer and the Chief Financial Officer of the General Partner that Parent would be submitting a proposal with respect to the Proposed Transaction the following morning. On February 11, 2022, Thomas P. Stokes, Parent’s Head of Finance Acquisitions & Divestments and New Business Development, Americas, submitted to the GP Board on behalf of an affiliate of Parent a proposal with respect to the Proposed Transaction reflecting consideration of $12.89 per Public Common Unit payable in cash (the “Initial Proposal”), which was the closing price of the Common Units on the prior trading day. The Initial Proposal indicated that the applicable affiliate of Parent was only interested in acquiring all of the Public Common Units and had no interest in pursuing other strategic alternatives involving the Partnership. That same day, Parent amended its Schedule 13D to publicly disclose the Initial Proposal, and each of the Partnership and Parent issued press releases announcing the proposal.

Later that day, the GP Board held a meeting at which the GP Board constituted the Conflicts Committee and authorized the Conflicts Committee to, among other things, review, evaluate and negotiate the Proposed Transaction for the purpose of determining whether to grant “Special Approval” under the Partnership Agreement. Following the meeting of the GP Board, the Conflicts Committee held an initial meeting to discuss the Initial Proposal.

Following the Initial Proposal, Mr. Stokes held several discussions on February 14, 2022 and February 15, 2022 with management of the General Partner and the members of the GP Board concerning next steps with regard to the Proposed Transaction and preparation of a management presentation to the Conflicts Committee and its advisors.

On February 14 and 15, 2022, the Conflicts Committee interviewed representatives of potential legal counsels to advise the Conflicts Committee in connection with the Proposed Transaction. The Conflicts Committee ultimately selected Gibson Dunn as its legal counsel with respect to the Proposed Transaction.

On February 22, 2022, the Conflicts Committee met with the other members of the GP Board and provided a general status update of the Proposed Transaction process.

On February 23 and 24, 2022, the Conflicts Committee interviewed representatives of four potential financial advisors to advise the Conflicts Committee in connection with the Proposed Transaction.

On February 25, 2022, the Conflicts Committee met with representatives of Gibson Dunn. At the meeting, the Conflicts Committee approved the engagement of Intrepid as its financial advisor with respect to the Proposed Transaction. The Conflicts Committee and representatives of Gibson Dunn also discussed the transaction process, certain issues and considerations in the evaluation and negotiation of the Proposed Transaction, and next steps.

On March 4, 2022, the GP Board, by resolutions, confirmed that each of James J. Bender, Carlos A. Fierro and Rob L. Jones continued to satisfy the requirements under the Partnership Agreement to serve on the Conflicts Committee and authorized, and ratified the prior authorization of, the Conflicts Committee to (i) consider, review, evaluate and analyze any potential conflicts that may exist among or between (A) the General Partner and its affiliates and (B) the Partnership and the Public Unitholders arising in connection with the Proposed Transaction; (ii) perform appropriate due diligence on and valuation analyses with respect to the Proposed Transaction; (iii) consider, review, evaluate and analyze the terms and conditions of the Proposed Transaction submitted to the GP Board by an affiliate of Parent, on behalf of the Partnership and the Public Unitholders;

 

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(iv) negotiate the terms and conditions and any documentation of the Proposed Transaction on behalf of the Partnership and the Public Unitholders directly with Parent and its affiliates and the counsel and advisor to each of them, as the Conflicts Committee deems necessary or appropriate, in its sole discretion; (v) review and make such investigation of potential alternatives to the Proposed Transaction, including maintaining the status quo, as the Conflicts Committee deems necessary or appropriate, in its sole discretion; (vi) consult with, advise and/or direct management of the Partnership in connection with discussions and/or negotiations concerning potential terms and conditions of the Proposed Transaction; (vii) determine whether the Proposed Transaction is in the best interest of the Partnership and the Public Unitholders; and (viii) determine whether to approve, and to recommend that the GP Board approve, the Proposed Transaction, with any such approval by the Conflicts Committee constituting “Special Approval” for all purposes under the Partnership Agreement, including but not limited to Section 7.10(a) thereof. The GP Board also authorized and ratified the retention of legal and financial advisors by the Conflicts Committee in its sole discretion.

On March 8, 2022, the Conflicts Committee met with representatives of Gibson Dunn to discuss the materials prepared by Gibson Dunn regarding the role and duties of the Conflicts Committee, the framework for resolution of conflicts of interest involving the Partnership, the process and recommendations for resolution of conflicts of interest in connection with the Conflicts Committee’s exploration, consideration, review and evaluation of the Proposed Transaction and related topics. After such discussion, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid, at which meeting Intrepid reviewed the materials prepared by Intrepid with respect to the Proposed Transaction. The Conflicts Committee and representatives of Gibson Dunn and Intrepid also discussed the transaction process, certain issues and considerations in the evaluation and negotiation of the Proposed Transaction, and next steps.

On March 9, 2022, the Conflicts Committee and representatives of Gibson Dunn and Intrepid met with management of the General Partner, members of the Parent transaction team and representatives of Barclays, Evercore and Baker Botts, during which meeting management of the General Partner presented to the Conflicts Committee and its advisors a presentation regarding the Proposed Transaction. During the presentation, management of the General Partner provided a summary of management’s projections relating to the Partnership’s business at an asset level, discussed specific potential positive and negative impacts on the Partnership’s business during the forecast period and answered questions posed by Intrepid and members of the Conflicts Committee regarding the projections. After the meeting with management of the General Partner, the Conflicts Committee, Gibson Dunn and Intrepid had a preliminary discussion regarding the presentation and next steps for the Proposed Transaction.

Also on March 9, 2022, the Conflicts Committee and its advisors were given access to a virtual data room containing various due diligence information with respect to the Partnership and its business. Following the management presentation, representatives of the General Partner held a series of due diligence sessions with Intrepid, Gibson Dunn and members of the Conflicts Committee through April 11, 2022. Aside from participation in these due diligence sessions and management presentations, management of the General Partner and the members of the GP Board affiliated with Parent were not involved in the ongoing negotiations between Parent and the Conflicts Committee.

On March 28, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the materials prepared by Intrepid evaluating the Proposed Transaction based on the preliminary data provided by the Parent transaction team and management of the General Partner.

On April 8, 2022, the Parent transaction team and management of the General Partner provided updated financial projections of the Partnership (the “Interim Projections”) to the Conflicts Committee and its advisors.

On April 12, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the materials prepared by Intrepid evaluating the Proposed Transaction based on the Interim Projections.

 

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On April 13, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss a potential counterproposal with respect to the Proposed Transaction. After the discussion, the Conflicts Committee members unanimously agreed to reject the Initial Proposal and to make a counterproposal whereby an affiliate of Parent would acquire all of the Public Common Units at a price of $17.50 per Public Common Unit payable in cash (the “First Committee Counterproposal”). The Conflicts Committee members also unanimously agreed that, on the Conflicts Committee’s behalf, Gibson Dunn should deliver to the applicable affiliate of Parent a letter setting forth the First Committee Counterproposal.

On April 14, 2022, Gibson Dunn delivered the letter setting forth the First Committee Counterproposal to the applicable affiliate of Parent on behalf of the Conflicts Committee.

After receiving the First Committee Counterproposal, on April 18, 2022, representatives of Parent held a meeting with Barclays and Evercore at which the details of the First Committee Counterproposal were discussed along with how the premium implicit in the counterproposal compared to recent precedent transactions. Following this meeting and internal discussions, on April 21, 2022, an affiliate of Parent delivered to the Conflicts Committee a response to the First Committee Counterproposal, which proposed consideration of $14.02 per Public Common Unit payable in cash (such response, the “Second Proposal,” and such proposed consideration, the “Second Proposed Consideration”).

On April 25, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the Second Proposal, at which meeting Intrepid reviewed the materials prepared by Intrepid evaluating the Proposed Transaction. After such discussion, the Conflicts Committee members unanimously agreed that Intrepid should contact Evercore and Barclays to obtain more information with respect to the Second Proposal, including the rationale for the Second Proposed Consideration, and report back to the Conflicts Committee.

On April 26, 2022, Intrepid had a call with Barclays regarding the Second Proposal, during which Barclays informed Intrepid that Barclays did not have Parent and its affiliates’ valuation framework supporting the Second Proposed Consideration.

On April 27, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid. Intrepid reported on the call with Barclays on the previous day. Discussion then ensued among the Conflicts Committee, Gibson Dunn and Intrepid regarding the Second Proposal and Intrepid’s call with Barclays. After such discussion, the Conflicts Committee members unanimously agreed to reject the Second Proposal, noting that the Second Proposed Consideration was well below the Conflicts Committee’s view of the intrinsic value of the Partnership and below the market trading price of the Common Units. The Conflicts Committee members directed Gibson Dunn to prepare a draft form of counterproposal letter for the Conflicts Committee’s review, with the amount of the proposed consideration to be further discussed by the Conflicts Committee.

On April 29, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss a potential counterproposal. After such discussion, the Conflicts Committee members unanimously agreed: (i) to make a counterproposal whereby an affiliate of Parent would acquire all of the Public Common Units at a price of $17.10 per Public Common Unit payable in cash (the “Second Committee Counterproposal”) and (ii) that, on the Conflicts Committee’s behalf, Intrepid should deliver the Second Committee Counterproposal verbally to Barclays and Gibson Dunn should deliver to the applicable affiliate of Parent a letter setting forth the Second Committee Counterproposal. Later that day, on the Conflicts Committee’s behalf, Intrepid verbally delivered the Second Committee Counterproposal to Barclays, and Gibson Dunn delivered a letter setting forth the Second Committee Counterproposal to the applicable affiliate of Parent.

Between May 2 and May 6, 2022, Parent held a series of discussions with its financial and legal advisors to discuss the Second Committee Counterproposal.

 

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On May 6, 2022, Intrepid had a call with Barclays. During the call, Barclays verbally delivered a proposal with respect to the Proposed Transaction on behalf of an affiliate of Parent, which proposed consideration of $14.75 per Public Common Unit payable in cash (such proposal, the “Third Proposal,” and such proposed consideration, the “Third Proposed Consideration”). After the call between Intrepid and Barclays, an affiliate of Parent delivered a letter setting forth the Third Proposal to the Conflicts Committee.

Later that day, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the Third Proposal. Representatives of Intrepid reviewed materials prepared by Intrepid analyzing the Proposed Transaction. The Conflicts Committee and representatives of Gibson Dunn and Intrepid also discussed materials sent by a purported holder of Public Common Units to the Conflicts Committee regarding such purported holder’s valuation of the Public Common Units. After such discussion, the Conflicts Committee instructed Intrepid to call Barclays to obtain more information regarding the Third Proposal, including the rationale of the Third Proposed Consideration, which Intrepid did after the meeting.

Later that day, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid, during which meeting representatives of Intrepid reported on the call with Barclays earlier that afternoon. The Conflicts Committee and representatives of Gibson Dunn and Intrepid then discussed the Third Proposal. After such discussion, the Conflicts Committee members unanimously agreed: (i) to reject the Third Proposal; and (ii) that Intrepid should inform Barclays, on behalf of the Conflicts Committee, that the Conflicts Committee would not approve the Proposed Transaction for consideration less than $16.00 per Public Common Unit.

On May 9, 2022, Intrepid had a call with Barclays, during which Intrepid informed Barclays, on behalf of the Conflicts Committee, that the Conflicts Committee was currently contemplating a price per Public Common Unit that was in the $16s. In response, on behalf of an affiliate of Parent, Barclays asked that the Conflicts Committee deliver its counterproposal in writing. Also on May 9, 2022, the chairman of the Conflicts Committee, Mr. James Bender, and representatives of Gibson Dunn and Intrepid received an oral presentation from a purported holder of Public Common Units regarding such purported holder’s valuation of the Public Common Units.

Later that day, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid, during which meeting representatives of Intrepid reported on the call with Barclays earlier that day. Discussion then ensued among the Conflicts Committee members and representatives of Gibson Dunn and Intrepid regarding a potential counterproposal and negotiation strategy. After such discussion, the Conflicts Committee members unanimously agreed: (i) to make a counterproposal whereby an affiliate of Parent would acquire all of the Public Common Units at a price of $16.85 per Public Common Unit payable in cash (the “Third Committee Counterproposal”) and (ii) that, on the Conflicts Committee’s behalf, Intrepid should deliver the Third Committee Counterproposal verbally to Barclays, and Gibson Dunn should deliver to the applicable affiliate of Parent a letter setting forth the Third Committee Counterproposal.

On May 10, 2022, on the Conflicts Committee’s behalf, Intrepid verbally delivered the Third Committee Counterproposal to Barclays, and Gibson Dunn delivered to the applicable affiliate of Parent a letter setting forth the Third Committee Counterproposal. Following receipt of the Third Committee Counterproposal, Mr. Stokes called Mr. Bender to propose a meeting between the parties and their financial and legal advisors, which was set for May 24, 2022.

Prior to the May 24, 2022 meeting, Parent held a series of discussions with its financial and legal advisors to prepare for such meeting. Parent also held discussions with its advisors regarding potential alternative transaction structures should an agreement with the Conflicts Committee not be reached on acceptable terms. These alternative structures involved conversion of the Preferred Units and additional Common Unit purchases by Parent, either through a tender offer, individually negotiated purchases or open market purchases. No such alternative structure was discussed with the Conflicts Committee or its advisors.

On May 24, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss and prepare for the upcoming meeting later that afternoon of the Conflicts Committee and its advisors with Parent and its advisors regarding the Proposed Transaction.

 

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Later that day, the Conflicts Committee and representatives of Intrepid and Gibson Dunn met with members of the Parent transaction team and representatives of Barclays, Evercore and Baker Botts. At that meeting, the parties’ financial advisors discussed the respective methodologies they were using to evaluate the Proposed Transaction and key differences between them. Mr. Stokes then noted for the Conflicts Committee and its advisors certain elements that Parent believed may be leading the Conflicts Committee to overvalue the Partnership. After this meeting, Mr. Stokes and Mr. Bender further discussed the matters raised at the meeting and potential paths forward with respect to the Proposed Transaction. Mr. Stokes advised that Parent would revert with a revised proposal.

Following the May 24, 2022 meeting, Parent held further discussions with its advisors regarding potential alternative transaction structures, but continued to view a negotiated transaction with the Conflicts Committee as the preferred path forward. Additionally, as part of its normal business planning process, management of the General Partner prepared updated projections for the Partnership’s business during this period.

On June 15, 2022, the Parent transaction team and management of the General Partner provided to the Conflicts Committee and its advisors further updated financial projections of the Partnership (the “Updated Financial Projections”).

On June 16, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the Updated Financial Projections, during which meeting representatives of Intrepid reviewed with the Conflicts Committee the materials prepared by Intrepid comparing the Updated Financial Projections against the Interim Projections. After such discussion, the Conflicts Committee members unanimously agreed that Intrepid should contact Parent and Parent’s financial advisors on behalf of the Conflicts Committee to arrange a meeting among the Conflicts Committee, Parent and management of the General Partner to discuss the Updated Financial Projections.

On June 20, 2022, Mr. Bender had a call with Mr. Stokes with respect to the Proposed Transaction. During the call, Mr. Stokes discussed the Updated Financial Projections and informed Mr. Bender that an affiliate of Parent would deliver to the Conflicts Committee later that day a proposal with respect to the Proposed Transaction proposing consideration of $15.10 per Public Common Unit payable in cash (such proposal, the “Fourth Proposal,” and such proposed consideration, the “Fourth Proposed Consideration”).

Following the call, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the call between Mr. Bender and Mr. Stokes. After such discussion, the Conflicts Committee members agreed that, after the receipt of the Fourth Proposal, the Conflicts Committee would convene another meeting to discuss the Proposed Transaction. Later that day, an affiliate of Parent delivered a letter setting forth the Fourth Proposal to the Conflicts Committee. After the delivery of the Fourth Proposal, Parent continued to explore with its advisors potential alternative transaction structures.

On June 22, 2022, the Conflicts Committee and representatives of Gibson Dunn and Intrepid met with members of the Parent transaction team, management of the General Partner and representatives of Barclays, Evercore and Baker Botts, during which meeting management of the General Partner responded to questions asked by Intrepid on behalf of the Conflicts Committee with respect to the Updated Financial Projections.

On June 23, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss next steps for the Proposed Transaction. After such discussion, the Conflicts Committee members unanimously agreed that Intrepid should update its financial analysis based on the Updated Financial Projections and current capital market conditions and present to the Conflicts Committee such updated analysis at a later meeting.

On June 28, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the updated financial analysis prepared by Intrepid with respect to the Proposed Transaction based on the Updated Financial Projections and current capital market conditions. The Conflicts Committee members and

 

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representatives of Gibson Dunn and Intrepid also discussed communications from purported holders of Public Common Units and next steps with respect to the Proposed Transaction. After such discussion, the Conflicts Committee members unanimously directed Intrepid to contact Evercore and Barclays to discuss the Proposed Transaction, which Intrepid did after the meeting.

Later that day, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the call Intrepid had with Evercore and Barclays earlier that day. After such discussion, the Conflicts Committee members unanimously agreed that, on behalf of the Conflicts Committee, Mr. Bender should contact Mr. Stokes to discuss the Proposed Transaction.

On the same day, the Parent transaction team and management of the General Partner provided to the Conflicts Committee and its advisors further updated financial projections of the Partnership (the “Final Financial Projections”).

On June 29, 2022, Mr. Bender had a call with Mr. Stokes, during which Mr. Stokes, on behalf of an affiliate of Parent, verbally delivered a proposal to the Conflicts Committee with respect to the Proposed Transaction, which proposed consideration of $15.75 per Public Common Unit payable in cash (such proposal, the “Fifth Proposal,” and such proposed consideration, the “Fifth Proposed Consideration”).

On June 30, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the call between Mr. Bender and Mr. Stokes on the previous day, the Fifth Proposal and a potential counterproposal to be delivered by the Conflicts Committee to an affiliate of Parent. After such discussion, the Conflicts Committee members unanimously agreed: (i) to make a counterproposal whereby an affiliate of Parent would acquire all of the Public Common Units either (A) for $15.75 per Public Common Unit payable in cash, subject to approval by holders of a majority of the Public Common Units (“Majority of the Minority Approval”), or (B) for $16.00 per Public Common Unit payable in cash (the “Fourth Committee Counterproposal”); and (ii) that, on behalf of the Conflicts Committee, Mr. Bender should contact Mr. Stokes to verbally deliver the Fourth Committee Counterproposal, which Mr. Bender did on July 1, 2022.

Between July 1, 2022 and July 9, 2022, Mr. Bender had several calls with Mr. Stokes regarding the Fourth Committee Counterproposal and the Proposed Transaction. On a call between Mr. Bender and Mr. Stokes on July 9, 2022, Mr. Stokes, on behalf of an affiliate Parent, verbally delivered a proposal to the Conflicts Committee whereby: (i) an affiliate of Parent would acquire all the Public Common Units for $15.85 per Public Common Unit payable in cash (such proposed consideration, the “Sixth Proposed Consideration”) without the Majority of the Minority Approval; (ii) the Partnership would make quarterly distributions on the Common Units consistent with past practice; and (iii) if a record date for such distribution occurs before the closing of the Proposed Transaction, such distribution would be paid even if the payment date is post-closing (such proposal, the “Sixth Proposal”).

On July 11, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid to discuss the Sixth Proposal, during which meeting representatives of Intrepid reviewed with the Conflicts Committee an updated financial analysis prepared by Intrepid with respect to the Proposed Transaction based on the Final Financial Projections. After such discussion, the Conflicts Committee members unanimously agreed: (i) that the Sixth Proposal was acceptable, subject to negotiation and execution of definitive documentation, receipt of an acceptable fairness opinion from Intrepid and formal approval by the Conflicts Committee; and (ii) that, on behalf of the Conflicts Committee, Mr. Bender should convey that view to Mr. Stokes, which Mr. Bender did later that day.

On July 12, 2022, Baker Botts had a call with Gibson Dunn regarding the draft merger agreement to be provided in connection with the Proposed Transaction. After the call, Baker Botts sent to Gibson Dunn the draft merger agreement and a support agreement to be executed by Holdings concurrently with the execution of the Merger Agreement (“Support Agreement”), pursuant to which Holdings would agree to deliver the consent of a Unit Majority.

 

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On July 15, 2022, the Conflicts Committee met with representatives of Gibson Dunn to discuss the draft merger agreement provided by Baker Botts in connection with the Proposed Transaction, the issues list prepared by Gibson Dunn summarizing Gibson Dunn’s proposed revisions to the draft merger agreement and a revised draft of the merger agreement prepared by Gibson Dunn, which, among other things, (i) required Holdings to deliver a written consent approving the Merger concurrently with the execution of the Merger Agreement and therefore eliminated the need for Holdings to execute a Support Agreement; (ii) revised the scope of the approval contemplated by the Conflicts Committee; (iii) deleted various interim operating covenants with respect to the Partnership; (iv) increased the cap on expense reimbursement to the terminating party in case of termination for material breach by the other party from $3.5 million to $5.0 million; and (v) required the Conflicts Committee’s authorization for any amendment to the Merger Agreement on behalf of the Partnership or the General Partner, or any determination, decision, approval, consent, waiver or agreement of the Partnership or the General Partner pursuant to the Merger Agreement. The Conflicts Committee members confirmed agreement with Gibson Dunn’s proposed changes in the revised draft of the merger agreement and directed Gibson Dunn to send the merger agreement markup to Baker Botts and the applicable affiliate of Parent, on behalf of the Conflicts Committee, which Gibson Dunn did after the meeting.

On July 19, 2022, the board of directors of Parent held a meeting at which they approved the Proposed Transaction and delegated to the Parent transaction team the authority to finalize and execute the transaction documentation. Later that day, Baker Botts sent a further revised merger agreement to Gibson Dunn. Among other things, the further revised draft (i) revised the scope of the approval contemplated by the Conflicts Committee; (ii) reinserted certain interim operating covenants with respect to the Partnership; (iii) accepted the increase of the cap on expense reimbursement in case of termination for material breach to $5.0 million; and (iv) required the Conflicts Committee’s approval for any amendment to the Merger Agreement on behalf of the Partnership or the General Partner, or any determination, decision, approval, consent, waiver or agreement of the Partnership or the General Partner pursuant to the Merger Agreement.

Later that day, Gibson Dunn sent a further revised draft of the merger agreement to Baker Botts and the applicable affiliate of Parent, which, among other things, revised the scope of the approval contemplated by the Conflicts Committee and deleted various interim operating covenants with respect to the Partnership.

Between July 20 and 23, 2022, representatives of Parent, Baker Botts, RLF and Gibson Dunn held a series of calls to discuss the scope of the approval contemplated by the Conflicts Committee. On July 20, 2022, management of the General Partner was informed of the status of the Proposed Transaction and was subsequently engaged to prepare materials regarding the Proposed Transaction for review by the full GP Board. Also between July 20 and 23, 2022, Baker Botts and Gibson Dunn exchanged further revised drafts of the merger agreement, which incorporated comments from management of the General Partner and representatives of the Partnership, and drafts of the Partnership’s disclosure schedules to the merger agreement prepared by representatives of the Partnership.

On July 25, 2022, the Conflicts Committee met with representatives of Gibson Dunn and Intrepid. Gibson Dunn discussed the summary of the Merger Agreement prepared by Gibson Dunn. Following the presentation by Gibson Dunn, representatives of Intrepid discussed materials prepared by Intrepid regarding financial analyses with respect to the Proposed Transaction and delivered an oral opinion, confirmed by delivery of a written opinion dated July 25, 2022, to the Conflicts Committee to the effect that, as of such date and based upon and subject to the assumptions, procedures, factors, qualifications, limitations and other matters set forth in Intrepid’s written opinion, the Merger Consideration in the Proposed Transaction to be received by the Public Unitholders pursuant to the Merger Agreement is fair, from a financial point of view, to the Public Unitholders. After all representatives of Intrepid left the meeting, Gibson Dunn provided the Conflicts Committee with Gibson Dunn’s legal assessment of the Conflicts Committee process. Thereafter, the Conflicts Committee, by unanimous vote, (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including the Public Unitholders; (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” of the Merger Agreement and the transactions contemplated thereby, including the Merger, for all purposes of the

 

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Partnership Agreement, including Section 7.10(a) thereof; (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on the terms and subject to the conditions set forth in the Merger Agreement; and (iv) recommended that the GP Board (A) direct that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement and (B) authorize the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement.

Following a report from Mr. Bender regarding the process undertaken by the Conflicts Committee and receipt of the recommendation of the Conflicts Committee (and the approval of the General Partner’s sole member), as well as discussion regarding, among other things, the Conflicts Committee’s receipt of Intrepid’s opinion, the terms of the transaction documents and their negotiation by the various parties, including in-house counsel for the Partnership, the terms of comparable recent MLP buy-in transactions, and the process undertaken by the Conflicts Committee in connection with the Merger, at a meeting duly called and held on July 25, 2022, the GP Board unanimously (a) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are (1) fair and reasonable to the Public Unitholders and (2) in the best interests of the Partnership, including the Public Unitholders, (b) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, (c) approved the execution, delivery and performance of the Merger Agreement and the transactions contemplated thereby, including the Merger, and (d) directed that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement, recommended approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by the Limited Partners and authorized the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement. Later that afternoon, the parties executed the Merger Agreement, Holdings delivered the Written Consent, and the parties issued a joint press release announcing the execution of the Merger Agreement. The Partnership also filed a Form 8-K announcing the execution of the Merger Agreement, and Parent amended its Schedule 13D to reflect the execution of the Merger Agreement.

Resolution of Conflicts of Interest; Standards of Conduct and Modification of Duties

Under Section 7.10(a) of the Partnership Agreement, whenever a potential conflict of interest exists between the General Partner or any of its affiliates, on the one hand, and the Partnership, any Group Member or any Partner (each as defined in the Partnership Agreement), on the other hand, any resolution or course of action by the General Partner or its affiliates in respect of such conflict of interest will be permitted and deemed approved by the General Partner and all of the Partnership’s limited partners and will not constitute a breach of the Partnership Agreement, of any Group Member Agreement (as defined in the Partnership Agreement), of any agreement contemplated in the Partnership Agreement or in any Group Member Agreement, or of any duty stated or implied by law or equity, if the resolution or course of action in respect of such conflict of interest is approved by “Special Approval.” “Special Approval” is defined in the Partnership Agreement as approval by a majority of the members of the Conflicts Committee.

Under Section 7.10(b) of the Partnership Agreement, whenever the General Partner, the GP Board or any committee thereof (including the Conflicts Committee) makes a determination or takes, or declines to take, any other action, or any of its affiliates causes it to do so, in its capacity as the general partner of the Partnership as opposed to in its individual capacity, whether under the Partnership Agreement, any Group Member Agreement or any other agreement, then, unless another express lesser standard is provided for in the Partnership Agreement, the General Partner, the GP Board or such committee, or such affiliates causing it to do so, shall make such determination or take or decline to take such other action in good faith and shall not be subject to any other or different duties or standards (including fiduciary duties or standards) imposed by the Partnership Agreement, any other agreement contemplated thereby or under the DRULPA or any other law, rule or regulation or at equity. Pursuant to Section 7.10(b) of the Partnership Agreement, a determination or other action is deemed to be in “good faith” for purposes of the Partnership Agreement if the person or persons making such determination or taking or declining to take such other action subjectively believe that the determination or other action or inaction is in, or not adverse to, the best interests of the Partnership.

 

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The Conflicts Committee determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including the Public Unitholders, and approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” as such term is defined in the Partnership Agreement.

Pursuant to Section 7.10(a) of the Partnership Agreement, if a transaction giving rise to a potential conflict of interest is approved by “Special Approval”, then it is presumed that, in making its decision to approve such transaction, the Conflicts Committee and/or the GP Board acted in good faith. In any proceeding brought by any limited partner challenging such approval by the Conflicts Committee or the GP Board, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.

Under Section 7.11(b) of the Partnership Agreement, the General Partner may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the advice or opinion of such persons as to matters that the General Partner reasonably believes to be within such person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such advice or opinion.

Reasons for Approval of the Merger Agreement and the Merger by the Conflicts Committee and the GP Board

The Conflicts Committee

The Conflicts Committee consists of the three directors who meet the independence and other qualifications under the Partnership Agreement for membership on the Conflicts Committee: James J. Bender (Chairman), Carlos A. Fierro and Rob L. Jones. The Partnership Agreement requires that members of the Conflicts Committee (i) not be officers or employees of the General Partner or directors, officers or employees of its affiliates, (ii) are not holders of any ownership interest in the General Partner or its affiliates other than (A) Common Units and (B) awards that are granted to such director in his capacity as a director under any long-term incentive plan, equity compensation plan or similar plan implemented by the General Partner or the Partnership and (iii) are determined by the GP Board to be independent under the independence standards for directors who serve on an audit committee of a board of directors established by the Exchange Act and the rules and regulations of the SEC thereunder and by the NYSE.

In connection with the Proposed Transaction, the GP Board on March 4, 2022, by resolutions, reaffirmed that each of the members of the Conflicts Committee continued to satisfy the requirements under the Partnership Agreement to serve on the Conflicts Committee and authorized, and ratified the prior authorization of, the Conflicts Committee to (i) consider, review, evaluate and analyze any potential conflicts that may exist among or between (A) the General Partner and its affiliates and (B) the Partnership and the Public Unitholders, arising in connection with the Proposed Transaction, (ii) perform appropriate due diligence on and valuation analyses with respect to the Proposed Transaction, (iii) consider, review, evaluate and analyze the terms and conditions of the Proposed Transaction submitted to the GP Board by an affiliate of Parent, on behalf of the Partnership and the Public Unitholders, (iv) negotiate the terms and conditions and any documentation of the Proposed Transaction on behalf of the Partnership and the Public Unitholders directly with Parent and its affiliates and the counsel and advisor to each of them, as the Conflicts Committee deems necessary or appropriate, in its sole discretion, (v) review and make such investigation of potential alternatives to the Proposed Transaction, including maintaining the status quo, as the Conflicts Committee deems necessary or appropriate, in its sole discretion, (vi) consult with, advise and/or direct management of the Partnership in connection with discussions and/or negotiations concerning potential terms and conditions of the Proposed Transaction, (vii) determine whether the Proposed Transaction is in the best interest of the Partnership and the Public Unitholders, and (viii) determine whether to approve, and to recommend that the GP Board approve, the Proposed Transaction, with any such approval by the Conflicts Committee constituting “Special Approval” for all purposes under the Partnership Agreement, including but not limited to Section 7.10(a) thereof. The GP Board also authorized and ratified the retention of legal and financial advisors by the Conflicts Committee in its sole discretion.

 

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The Conflicts Committee conducted an extensive review and evaluation of the Proposed Transaction and negotiated with Parent and its representatives with respect to the Merger and the Merger Agreement. The Conflicts Committee retained Intrepid as its financial advisor and Gibson Dunn as its legal counsel. In the course of reaching its decision to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, the Conflicts Committee considered a number of factors affecting the Public Unitholders in its deliberations.

On July 25, 2022, the Conflicts Committee unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including the Public Unitholders; (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” of the Merger Agreement and the transactions contemplated thereby, including the Merger, for all purposes of the Partnership Agreement, including Section 7.10(a) thereof; (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on the terms and subject to the conditions set forth in the Merger Agreement; and (iv) recommended that the GP Board (A) direct that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement and (B) authorize the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement.

Reasons for the Conflicts Committee’s Approval

At a meeting of the Conflicts Committee on July 25, 2022, the Conflicts Committee, by unanimous vote, (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including the Public Unitholders; (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” of the Merger Agreement and the transactions contemplated thereby, including the Merger, for all purposes of the Partnership Agreement, including Section 7.10(a) thereof; (iii) recommended that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger, on the terms and subject to the conditions set forth in the Merger Agreement; and (iv) recommended that the GP Board (A) direct that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval pursuant to Section 14.3 of the Partnership Agreement and (B) authorize the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement.

In evaluating the Proposed Transaction and reaching its determination and approval, the Conflicts Committee considered information supplied by management of the General Partner and Parent and its affiliates, consulted with its legal and financial advisors, and considered a number of factors. The Conflicts Committee also consulted with its legal counsel regarding its authority and duties.

The Conflicts Committee considered the following factors to be generally positive or favorable in making its determination and granting “Special Approval” of the Proposed Transaction:

 

•

Through negotiation, the Conflicts Committee was able to increase the Merger Consideration by $2.96 per Public Common Unit, or approximately 23% as compared to the $12.89 per Public Common Unit offer initially proposed by an affiliate of Parent on February 11, 2022.

 

•

The Conflicts Committee believed that $15.85 per Public Common Unit was likely the highest price per Public Common Unit that Parent would be willing to pay at the time of the Conflicts Committee’s determination and grant of “Special Approval.”

 

•

The Merger Consideration represents an approximately 25% premium to the trailing 30-day VWAP of the Common Units as of February 10, 2022 (the last trading day prior to the time that Parent offered to acquire all of the Public Common Units), an approximate 23% premium to the closing price of the Common Units on February 10, 2022, and an approximate 13% premium to the trailing 30-day VWAP of the Common Units as of July 22, 2022 (the last trading day prior to the Conflicts Committee’s approval of the Merger).

 

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•

The financial analyses prepared by Intrepid, as financial advisor to the Conflicts Committee, and the oral opinion of Intrepid delivered to the Conflicts Committee on July 25, 2022 and subsequently confirmed in writing, which analyses and opinion the Conflicts Committee adopted as its own, that, as of such date and based upon and subject to the assumptions, procedures, factors, qualifications, limitations and others matters set forth in Intrepid’s written opinion (as more fully described below under “Opinion of Financial Advisor to the Conflicts Committee”), the Merger Consideration in the Proposed Transaction to be received by the Public Unitholders pursuant to the Merger Agreement is fair, from a financial point of view, to the Public Unitholders.

 

•

The Merger Consideration is an all-cash amount, which the Conflicts Committee believes provides greater value to the Public Unitholders than the long-term value of the Partnership as a publicly traded partnership, after taking into account the opportunities for, as well as the risks and challenges facing, the Partnership’s current business and financial prospects.

 

•

The Conflicts Committee believed that there were no viable alternative transactions for the Partnership in lieu of a transaction with Parent that would provide comparable or superior value, in the light of Parent’s controlling position in the Partnership through Parent’s indirect ownership of the General Partner and approximately 72% of the voting power of the Partnership’s outstanding limited partner interests as of July 25, 2022, the Parent’s affiliate being the sole lender to the Partnership and its subsidiaries and the Conflicts Committee’s recognition of overall risks and uncertainties in midstream corporate and asset transactions.

 

•

The Conflicts Committee’s belief that it was unlikely that any other transaction with a third party involving a sale of the Partnership or a significant interest in the Partnership or its assets could be consummated at the time of the Conflict Committee’s determination and approval in the light of Parent’s stated position when it delivered the Initial Proposal (and throughout its negotiations with the Conflicts Committee) that it was only interested in acquiring all of the outstanding Common Units owned by the Public Unitholders and had no interest in approving any combination of the Partnership with, or a sale of all or substantially all of the assets of the Partnership to, any other acquirer.

 

•

Further increases in market interest rates, which are expected, may adversely affect the attractiveness of the Common Units to investors compared to other financial instruments or alternate investment opportunities.

 

•

The Conflicts Committee’s belief that investor sentiment increasingly disfavors MLP structures as compared to alternative structures and, as a result, the state of the MLP debt and equity capital markets will continue to present challenges for the Partnership to fund acquisitions and growth capital expenditures.

 

•

The receipt of cash consideration eliminates downside risk associated with the continued ownership of the Common Units, including any possible decrease in the future revenues and cash available for distribution, growth or value of the Partnership following the Merger.

 

•

Parent’s and its affiliates’ historical status as one of the Partnership’s largest customers and primary sources of debt capital and the dependence of the Partnership’s growth on the growth of Parent’s and its affiliates’ businesses.

 

•

The Partnership’s base business being unable to sustain the prior distribution level, leading the Partnership to decrease its distribution by 35% in the second quarter of 2021 and to maintain its distribution at such lower level.

 

•

Given the difficulty the Partnership would face in accessing the capital markets to fund a dropdown, growth prospects for the Partnership were expected to be limited.

 

•

The Written Consent executed and delivered by Holdings is sufficient to approve the Proposed Transaction on behalf of the Limited Partners, which increases certainty of Closing.

 

•

Certain terms of the Merger Agreement, principally:

 

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•

Each Public Unitholder will receive $15.85 in cash for each Public Common Unit owned;

 

•

Parent’s obligation to reimburse certain of the Partnership’s expenses, up to $5.0 million, in connection with the termination of the Merger Agreement as a result of a material uncured breach by Parent;

 

•

Provisions prohibiting Parent and its subsidiaries, including the General Partner, from revoking or diminishing the authority of the Conflicts Committee, increasing the size of the Conflicts Committee or removing any member of the Conflicts Committee, in each case, without the consent of the Conflicts Committee between signing of the Merger Agreement and the Closing;

 

•

Provisions requiring the prior written approval of the Conflicts Committee to amend the Merger Agreement and to authorize other actions on behalf of the Partnership and the General Partner as specified in the Merger Agreement;

 

•

Provisions requiring the Partnership to make distributions of no less than $0.30 per Common Unit through the Effective Time and to pay any distributions with a record date prior to the Effective Time that remain unpaid as of the Effective Time;

 

•

The limited nature of the operational representations and warranties and covenants given by the Partnership and its subsidiaries;

 

•

The Merger Agreement contains only limited conditions and exceptions to the closing conditions, and the consummation of the Proposed Transaction is not contingent upon financing; and

 

•

A provision prohibiting Parent, Holdings and the General Partner from transferring any interests in the Partnership that Parent, Holdings and the General Partner or their respective subsidiaries own beneficially or of record until Closing or the earlier termination of the Merger Agreement.

As part of its deliberative process, the Conflicts Committee considered the following factors to be generally negative or unfavorable in making its determination and granting “Special Approval” of the Proposed Transaction:

 

•

The Conflicts Committee was not authorized to and did not engage in the review, solicitation, consideration or evaluation of any alternative proposals by third parties unaffiliated with Parent.

 

•

The Common Units have, in the past, traded at levels that exceed the per unit Merger Consideration.

 

•

The Merger Agreement does not include a condition that requires the approval by a majority of the Public Common Units, and therefore approval of the Proposed Transaction does not require the affirmative vote of any Public Unitholder.

 

•

The fact that the market price of the Common Units could be affected by many factors, including the following if the Merger Agreement is terminated: (i) the reason for such termination and whether such termination resulted from factors adversely affecting the Partnership, (ii) the possibility that, as a result of the termination of the Merger Agreement, possible acquirers (including Parent and its affiliates in any future consideration) may consider the Partnership to be an unattractive acquisition candidate and (iii) the possible sale of Common Units by short-term investors following an announcement that the Merger Agreement was terminated.

 

•

The risks and contingencies relating to the announcement and pendency of the Merger, including the potential for diversion of management and employee attention and the potential effect on the Partnership’s business and the restrictions on the conduct of the Partnership’s business during the period between the execution of the Merger Agreement and the completion of the Merger.

 

•

Certain terms of the Merger Agreement, principally:

 

•

The Partnership’s obligations to reimburse certain of Parent’s expenses, up to $5.0 million, in connection with the termination of the Merger Agreement as a result of a material uncured breach by the Partnership or the General Partner; and

 

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•

The operating covenants of the Partnership providing protection to Parent prior to Closing by restricting the Partnership’s ability to take certain actions prior to Closing that could reduce the value of the Common Units in the event the Merger Agreement is terminated.

 

•

The Public Unitholders are not entitled to dissenters’ or appraisal rights under the Merger Agreement, the Partnership Agreement or Delaware law.

 

•

The Public Unitholders will not have any equity participation in the Partnership following the consummation of the Proposed Transaction, and the Public Unitholders will accordingly cease to participate in the Partnership’s future earnings or growth, if any, or benefit from any increases, if any, in the value of the Common Units.

 

•

The Proposed Transaction may result in a cash tax liability for certain Public Unitholders.

 

•

The Partnership has incurred and will continue to incur transaction costs and expenses in connection with the Proposed Transaction, whether or not the Proposed Transaction is completed.

 

•

Litigation may be commenced in connection with the Proposed Transaction, and such litigation may increase costs and result in a diversion of management focus.

 

•

The Proposed Transaction might not be completed in a timely manner, or at all, and a failure to complete the Proposed Transaction could negatively affect the trading price of the Common Units.

 

•

Some of the directors and executive officers of Parent, its affiliates and the General Partner may have interests in the Proposed Transaction that are different from, or in addition to, the interests of the Public Unitholders.

The Conflicts Committee also considered the following factors relating to the procedural safeguards that the Conflicts Committee believed were and are present with respect to the fairness of the Proposed Transaction and to permit the Conflicts Committee to make its determination and grant “Special Approval”, which the Conflicts Committee believes support its decision and provide assurance as to the procedural fairness of the Proposed Transaction to the Public Unitholders:

 

•

The Conflicts Committee consists solely of directors who are not securityholders (other than of Common Units), officers or employees of the General Partner or its affiliates, are not officers, employees or controlling shareholders of Shell, any of its affiliates or the Partnership, are not otherwise affiliated with Parent and its affiliates and are all independent of management of the General Partner.

 

•

The terms and conditions of the Merger Agreement, including the Merger Consideration, were determined as a result of arm’s length negotiations between Parent and the Conflicts Committee and their respective representatives that included multiple proposals and counterproposals.

 

•

The Conflicts Committee retained independent financial and legal advisors with reputations, knowledge and experience with respect to public merger and acquisition transactions, MLPs, and midstream and oil and gas companies, as well as substantial experience advising MLPs and other companies with respect to transactions similar to the Proposed Transaction and familiarity with the Partnership and its business.

 

•

The members of the Conflicts Committee are members of the GP Board and are familiar with, and understand, the businesses, assets, liabilities, results of operations, financial condition and competitive positions and prospects of the Partnership.

 

•

The compensation of the members of the Conflicts Committee is in no way contingent on their approving the Proposed Transaction.

 

•

Although no specific issues came to the attention of the Conflicts Committee with respect to the information it was ultimately provided, the Conflicts Committee was aware that Parent, as the controlling party of the Partnership, controlled the delivery and presentation of information the Conflicts Committee received for purposes of evaluating the Proposed Transaction and the fairness of the Merger Consideration to be received by the Public Unitholders.

 

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•

The resolutions of the GP Board establishing the Conflicts Committee granted authority to the Conflicts Committee, including the authority to determine whether or not to proceed with the Proposed Transaction and to negotiate the terms and conditions of the Proposed Transaction, and the members of the Conflicts Committee were aware that they were under no obligation to approve, and could reject, the Proposed Transaction.

After taking into account all of the factors set forth above, as well as others, the Conflicts Committee concluded that the potential benefits of the Proposed Transaction outweighed any negative or unfavorable considerations and determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are in the best interests of the Partnership, including Public Unitholders.

The foregoing discussion of the information and factors considered by the Conflicts Committee is not intended to be exhaustive, but includes material factors the Conflicts Committee considered. In view of the variety of factors considered in connection with its evaluation of the Proposed Transaction and the complexity of these matters, the Conflicts Committee did not find it useful and did not attempt to quantify or assign any relative or specific weights to the various factors considered in making its determination and granting its approval. In addition, each of the members of the Conflicts Committee may have given differing weights to different factors. The Conflicts Committee granted its approval based on the totality of information presented to, and the investigation conducted by, the Conflicts Committee. It should be noted that certain statements and other information presented in this section are forward-looking in nature and, therefore, should be read in the light of the factors discussed under the heading “Cautionary Statement Regarding Forward-Looking Statements.”

The GP Board

The GP Board consists of seven directors, three of whom (Messrs. Bender, Fierro and Jones) constitute the Conflicts Committee. As such, some of the directors on the GP Board may have different interests in the Merger than the Public Unitholders. For a discussion of these and other interests of the members of the GP Board in the Merger, see “—Interests of the Directors and Executive Officers of the General Partner in the Merger.”

Following the receipt of the recommendation of the Conflicts Committee discussed above (and the approval of the General Partner’s sole member) and after considering the factors discussed below, on July 25, 2022, the GP Board unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are (A) fair and reasonable to the Public Unitholders and (B) in the best interests of the Partnership, including the Public Unitholders, (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Merger, (iii) approved the execution, delivery and performance of the Merger Agreement and the transactions contemplated thereby, including the Merger, and (iv) directed that the Merger Agreement and the transactions contemplated thereby, including the Merger, be submitted to a vote of the Limited Partners for approval, recommended approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, by the Limited Partners and authorized the Limited Partners to act by written consent. In making the determination described above, the GP Board has expressly adopted the analysis of the Conflicts Committee, which expressly adopted the analyses and opinion of Intrepid, among other factors considered in the course of making its recommendation that the GP Board approve the Merger Agreement and the transactions contemplated thereby, including the Merger.

Reasons for the GP Board’s Recommendation

In determining that the Merger Agreement and the Proposed Transaction are fair and reasonable to the Public Unitholders and in the best interests of the Partnership, including the Public Unitholders, recommending that the Limited Partners vote in favor of the Merger Agreement and the Proposed Transaction and authorizing the Limited Partners to act by written consent pursuant to Section 13.11 of the Partnership Agreement, the GP Board considered a number of factors, including the following material factors:

 

•

The terms of comparable recent MLP buy-in transactions, including the premium paid in such transactions.

 

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•

The approval of the General Partner’s sole member.

 

•

The factors considered by the Conflicts Committee to be generally positive or favorable in making its determination and granting “Special Approval” of the Proposed Transaction, including the material factors considered by the Conflicts Committee to be generally positive or favorable described under “—Reasons for the Conflicts Committee’s Approval.”

The GP Board considered the following factors to be generally negative or unfavorable in making its determination and approvals, and the related recommendation to the Limited Partners:

 

•

The Conflicts Committee was not authorized to and did not engage in the review, solicitation, consideration or evaluation of any alternative proposals by third parties unaffiliated with Parent. Since Parent indirectly controls the Partnership, it was unrealistic to expect an unsolicited third-party acquisition proposal to acquire assets or control of the Partnership, and it was unlikely that the Conflicts Committee could conduct a meaningful process to solicit interest in the acquisition of assets or control of the Partnership.

 

•

The factors considered by the Conflicts Committee to be generally negative or unfavorable in making its determination and granting “Special Approval” of the Proposed Transaction, including the material factors considered by the Conflicts Committee to be generally negative or unfavorable described under “—Reasons for the Conflicts Committee’s Approval.”

In making its determination, the GP Board also considered:

 

•

The Conflicts Committee’s unanimous approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, such approval constituting “Special Approval” for all purposes of the Partnership Agreement, and the recommendation to the GP Board discussed above.

 

•

The GP Board’s understanding of the process and procedures undertaken by the Conflicts Committee by which the Conflicts Committee arrived at its determination that the Merger Agreement and the transactions contemplated thereby, including the Merger, were in the best interests of the Partnership, including the Public Unitholders, which included:

 

•

the Conflicts Committee consists solely of directors who are not securityholders (other than of Common Units), officers or employees of the General Partner or its affiliates, are not officers, employees or controlling shareholders of Shell, any of its affiliates or the Partnership, are not otherwise affiliated with Parent and its affiliates and are all independent of management of the General Partner;

 

•

the Conflicts Committee retained independent financial and legal advisors with reputations, knowledge and experience with respect to public merger and acquisition transactions, MLPs, and midstream and oil and gas companies, as well as substantial experience advising MLPs and other companies with respect to transactions similar to the Proposed Transaction and familiarity with the Partnership and its business;

 

•

the GP Board’s determination that the members of the Conflicts Committee were independent and otherwise met the test for membership on the Conflicts Committee as set forth in the Partnership Agreement;

 

•

the GP Board’s resolution that the Conflicts Committee would not have any duty (fiduciary or otherwise) to consider the interests of the General Partner or its controlling affiliates, including Parent, in its consideration of the Proposed Transaction;

 

•

the terms and conditions of the Merger Agreement, including the Merger Consideration, were determined as a result of arm’s length negotiations between Parent and the Conflicts Committee and their respective representatives, including in-house counsel for the Partnership, that included multiple proposals and counterproposals;

 

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•

that certain actions, including amendment of the Merger Agreement, may not be taken without prior written approval of the Conflicts Committee; and

 

•

the Conflicts Committee’s receipt of Intrepid’s opinion, dated July 25, 2022, to the effect that, as of such date and based upon and subject to the assumptions, procedures, factors, qualifications, limitations and other matters set forth in Intrepid’s written opinion, the Merger Consideration in the Proposed Transaction to be received by the Public Unitholders pursuant to the Merger Agreement is fair, from a financial point of view, to the Public Unitholders.

In addition, under the SEC rules governing “going private” transactions, the Partnership and the General Partner are engaged in a “going private” transaction and, therefore, are required to express their position as to the fairness of the Merger to the Partnership’s “unaffiliated security holders,” as defined in Rule 13e-3 under the Exchange Act. The GP Board, on behalf of the General Partner and the Partnership, is making the following statements for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. The GP Board, on behalf of the General Partner and the Partnership, on the basis of the factors described above, believes that the Merger (which is the Rule 13e-3 transaction for which the Schedule 13E-3 was filed with the SEC) is both substantively and procedurally fair to the Public Unitholders. The GP Board did not retain an unaffiliated representative to act solely on behalf of the Public Unitholders for purposes of negotiating the terms of the Merger Agreement.

In addition, the GP Board did not consider the Partnership’s net book value, which is defined as total assets minus total liabilities, because the GP Board believed that net book value was not a material indicator of the value of the Partnership as a going concern. The GP Board also did not consider the liquidation value of the Partnership’s assets, and did not perform a liquidation analysis, because it considers the Partnership to be a viable going concern. Therefore, no appraisal of liquidation value was sought for purposes of valuing the Common Units, and the GP Board believes that the liquidation value of the Common Units is irrelevant to a determination of whether the Merger is fair to the Public Unitholders. The GP Board was not aware of, and thus did not consider, any firm offers or proposals made by any unaffiliated person during the past two years for: (i) a merger or consolidation of the Partnership with another company; (ii) the sale or transfer of all or substantially all of the Partnership’s assets; or (iii) the purchase of securities of the Partnership that would enable such person to exercise control of or significant influence over the Partnership. The GP Board is not aware of, and thus did not consider, any purchases by the Partnership of Common Units during the past two years.

The GP Board’s consideration of the factors described above reflects its assessment of the fairness of the Merger. The GP Board implicitly considered the value of the Partnership in a sale as a going concern by taking into account the Partnership’s current and anticipated business, financial conditions, results of operations, prospects and other forward-looking matters. The GP Board did not, however, explicitly calculate a stand-alone going concern value of the Partnership because the GP Board believes that going concern value is not an appropriate method of determining the value of the Common Units for purposes of the Merger. In the light of the fact that the Shell Filing Parties already have, and will continue to have, control of the Partnership, and that the Shell Filing Parties continue to desire to retain their Common Units, the GP Board does not believe that it would be appropriate for the Public Common Units to be valued on a basis that includes a control premium.

The foregoing discussion of the information and factors considered by the GP Board is not intended to be exhaustive, but includes material factors the GP Board considered. In view of the variety of factors considered in connection with its evaluation of the Merger and the complexity of these matters, the GP Board did not find it useful and did not attempt to quantify or assign any relative or specific weights to the various factors considered in making its determination and recommendation. In addition, each of the members of the GP Board may have given differing weights to different factors. Overall, the GP Board believed that the positive factors supporting the Merger outweighed the negative factors it considered. It should be noted that certain statements and other information presented in this section are forward-looking in nature and, therefore, should be read in the light of the factors discussed under the heading “Cautionary Statement Regarding Forward-Looking Statements.”

 

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Unaudited Financial Projections of the Partnership

In connection with the Proposed Transaction, the General Partner’s management prepared projections relating to the Partnership (without giving effect to the Merger) that included future financial and operating performance (the “Initial Projections”) of the Partnership, which were provided to the Conflicts Committee on March 9, 2022. The General Partner’s management based the Initial Projections on projections previously prepared during a periodic budgeting process. On April 8, 2022, the Parent transaction team and management of the General Partner provided the Interim Projections to the Conflicts Committee and its advisors, which provided updates for (i) selected key changes since the Initial Projections, (ii) certain new customer contracts and (iii) a change to the assumption that the Preferred Units would be converted. Subsequent to preparation of the Initial Projections and the Interim Projections, during discussions regarding the Proposed Transaction and as part of its normal business planning process, the General Partner’s management prepared the Final Financial Projections on June 15, 2022 and June 28, 2022, which superseded the Interim Projections and took into account the most recent forecasts and information with respect to the Partnership’s anticipated joint venture interests, updated views of the General Partner with respect to the Partnership’s future financial and operating performance and revised assumptions underlying interest rates being charged to the Partnership under certain of its credit facilities (such Final Financial Projections, together with the Initial Projections, the “Projections”). It should be noted that the Projections and certain statements and other information presented in this section are forward-looking in nature and, therefore, should be read in the light of the factors discussed under the heading “Cautionary Statement Regarding Forward-Looking Statements.”

The Projections were prepared only for internal purposes and not with a view toward public disclosure or toward compliance with GAAP, the published guidelines of the SEC, or the guidelines established by the American Institute of Certified Public Accountants for the preparation of prospective financial information but, in the view of the General Partner’s management, were prepared on a reasonable basis and reflect the best then-available estimates and judgments of the General Partner’s management, taking into account, among other things, projections provided by operators of relevant joint ventures. However, this information is not fact and should not be relied upon as necessarily predictive of actual future results, and readers of this information statement are cautioned not to place undue reliance on this and other prospective financial information.

The Projections were provided to the Conflicts Committee and Intrepid in connection with its evaluation of the Proposed Transaction and the Final Financial Projections were provided to Intrepid for its use and reliance in connection with its financial analyses and opinion described under “—Opinion of Financial Advisor to the Conflicts Committee.”

These Projections are included below to give Public Unitholders access to certain non-public unaudited prospective financial information that was made available to the Conflicts Committee, the GP Board, and Intrepid in connection with the Proposed Transaction. The inclusion of these Projections in this information statement should not be regarded as an indication that the Partnership, the General Partner or their respective representatives considered or consider the Projections to be necessarily predictive of actual future performance or events, and the Projections set forth below should not be relied upon as such.

Uncertainties are inherent in prospective financial information of any kind. None of the Partnership, the General Partner or any of their respective affiliates, officers, directors, managers, advisors or other representatives has made or makes any representation to any Limited Partner or can give any assurance to any Limited Partner or any other person regarding the ultimate performance of the Partnership compared to the information set forth below or that any such results will be achieved.

While the Partnership may provide public earnings guidance from time to time, the Partnership does not as a matter of course publicly disclose other financial forecasts as to future earnings or financial performance or results because of, among other reasons, the uncertainty underlying assumptions and estimates. The Projections summarized below were prepared by the General Partner’s management.

 

33

Neither Ernst & Young LLP, the Partnership’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

The Projections are, in general, prepared primarily for internal use. Such internal forecasts are inherently subjective in nature, susceptible to interpretation and, accordingly, such forecasts may not be achieved. The internal financial forecasts also reflect numerous assumptions made by management of the General Partner, including material assumptions with respect to the business of the Partnership for the periods covered by the Projections. Such assumptions may not be achieved and are subject to significant uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the control of Parent or the Partnership. Accordingly, there can be no assurance that the assumptions made in preparing the Projections will be realized. Some of the assumptions made by management of the General Partner in connection with the Projections included, but were not limited to, the following:

 

•

weather conditions;

 

•

commodity pricing;

 

•

the amount and timing of distributions made to the Partnership by its equity method investments;

 

•

the amount and timing of distributions to the unitholders by the Partnership;

 

•

the amount and timing of the administrative fee paid by the Partnership under its Omnibus Agreement effective February 1, 2019, by and among the Partnership, the General Partner, SPLC and Shell Midstream Operating LLC;

 

•

the amounts of revenue and expenses per budget;

 

•

the demand for the Partnership’s transportation, storage and other services;

 

•

the competitive landscape in any market that the Partnership serves;

 

•

the ability of the Partnership to renew or extend agreements with its customers and the terms of such renewals or extensions;

 

•

the ability of the Partnership to remain a public entity;

 

•

the amounts and nature of future capital expenditures, including the allocation of capital to expansion capital expenditures or maintenance capital expenditures; and

 

•

other general business, market, industry and interest rate assumptions.

There will be differences between actual and forecasted results, and the differences may be material. Important factors that may affect actual results and cause these Projections not to be achieved include, but are not limited to, risks and uncertainties relating to the Partnership’s business (including the Partnership’s ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, general business and economic conditions, the regulatory environment and other factors described in or referenced under “Cautionary Statement Regarding Forward-Looking Statements” and those risks and uncertainties detailed in the “Risk Factors” sections of the Partnership’s public filings with the SEC, including the Partnership’s Annual Report on Form 10-K filed with the SEC on February 24, 2022. The risk that these uncertainties and contingencies could cause the assumptions to fail to be reflective of actual results is further increased given the length of time in the future over which these assumptions apply. Any assumptions and projections in early periods could have a compounding effect on the projections shown for later periods. Thus, any failure of an assumption or projections to be reflective of actual results in an early period could have a greater effect on the projected results failing to be reflective of actual events in later periods.

 

34

Initial Projections

 

		Year Ended December 31,
		2022E				2023E				2024E				2025E				2026E
		(Financial metrics in millions)
Revenue Total, Net of Cost of Goods Sold		$	520			$	524			$	512			$	505			$	525
Operating expense		$	(242	)		$	(247	)		$	(258	)		$	(259	)		$	(252	)
Depreciation and amortization		$	(54	)		$	(55	)		$	(55	)		$	(57	)		$	(57	)
Property and other taxes		$	(22	)		$	(22	)		$	(22	)		$	(23	)		$	(23	)
Loss/gain from disposition of fixed assets		$	0			$	0			$	0			$	0			$	0
Total costs and expenses		$	(318	)		$	(324	)		$	(335	)		$	(338	)		$	(332	)
Operating income		$	202			$	199			$	177			$	166			$	193
Income from equity investment		$	397			$	464			$	466			$	474			$	490
Dividend income from investment		$	0			$	0			$	0			$	0			$	0
Other income / expense		$	37			$	48			$	48			$	47			$	47
Income from other investments		$	434			$	512			$	513			$	521			$	537
Interest income / expense		$	(57	)		$	(59	)		$	(63	)		$	(66	)		$	(68	)
Income before income taxes		$	579			$	652			$	627			$	621			$	661
Tax expense		$	0			$	0			$	0			$	0			$	0
Net Income		$	579			$	652			$	627			$	621			$	661
Net income attributable to non-controlling interests		$	(12	)		$	(15	)		$	(15	)		$	(15	)		$	(14	)
Net income attributable to Parent		$	0			$	0			$	0			$	0			$	0
Net income attributable to the Partnership		$	566			$	637			$	612			$	606			$	647

 

		Year Ended December 31,
		2022E				2023E				2024E				2025E				2026E
		(Financial metrics in millions, except per Common Unit figures)
Net Income		$	579			$	652			$	627			$	621			$	661
Depreciation		$	54			$	55			$	55			$	57			$	57
Contract asset amortization		$	15			$	15			$	15			$	15			$	15
Loss (gain) from disposition of fixed assets		$	0			$	0			$	0			$	0			$	0
Allowance oil reduction to net realizable value		$	0			$	0			$	0			$	0			$	0
Interest expense and income tax expense, net		$	58			$	60			$	64			$	66			$	69
Distributions from equity investments		$	(35	)		$	(38	)		$	(37	)		$	(36	)		$	(35	)
Equity method distributions included in other income		$	455			$	536			$	543			$	548			$	564
Income from equity investments		$	(397	)		$	(464	)		$	(466	)		$	(474	)		$	(490	)
Adjusted EBITDA(1)		$	728			$	815			$	801			$	797			$	841
Adjusted EBITDA attributable to non-controlling interests		$	(12	)		$	(15	)		$	(15	)		$	(15	)		$	(14	)
Consolidated Partnership Adjusted EBITDA(1)		$	716			$	800			$	786			$	783			$	827
Partnership finance receivable, interest and income taxes paid(2)		$	(52	)		$	(54	)		$	(57	)		$	(59	)		$	(58	)
Partnership share of volume deficiency payments		$	0			$	0			$	0			$	0			$	0
Partnership share of maintenance capital expenditures		$	(37	)		$	(10	)		$	(25	)		$	(21	)		$	(21	)
Series A Convertible Preferred Coupon Payments		$	0			$	0			$	0			$	0			$	0
Reimbursements from Parent included in partners’ capital		$	0			$	0			$	0			$	0			$	0
Cash Available for Distribution(3)		$	627			$	736			$	704			$	703			$	748
Distributions per Common Unit per Year		$	1.20			$	1.20			$	1.20			$	1.20			$	1.20
Yearly Coverage Ratio		1.18x				1.38x				1.32x				1.32x				1.40x
Growth Capital Expenditure		$	23			$	26			$	28			$	25			$	36

 

35

Updated Projections

 

		Year Ended December 31,
		2022E(4)				2023E				2024E				2025E				2026E
		(Financial metrics in millions)
Revenue Total, Net of Cost of Goods Sold		$	559			$	538			$	551			$	521			$	545
Operating expense		$	(270	)		$	(258	)		$	(270	)		$	(258	)		$	(280	)
Depreciation and amortization		$	(50	)		$	(52	)		$	(53	)		$	(54	)		$	(55	)
Property and other taxes		$	(19	)		$	(20	)		$	(20	)		$	(20	)		$	(20	)
Loss/gain from disposition of fixed assets		$	0			$	0			$	0			$	0			$	0
Total costs and expenses		$	(340	)		$	(330	)		$	(342	)		$	(332	)		$	(355	)
Operating income		$	220			$	208			$	208			$	189			$	190
Income from equity investment		$	370			$	458			$	463			$	469			$	491
Dividend income from investment		$	0			$	0			$	0			$	0			$	0
Other income / expense		$	36			$	49			$	47			$	46			$	44
Income from other investments		$	407			$	507			$	511			$	515			$	536
Interest income / expense		$	(64	)		$	(74	)		$	(73	)		$	(75	)		$	(79	)
Income before income taxes		$	563			$	642			$	646			$	628			$	646
Tax expense		$	0			$	0			$	0			$	0			$	0
Net Income		$	563			$	642			$	646			$	628			$	646
Net income attributable to non-controlling interests		$	(8	)		$	(11	)		$	(11	)		$	(10	)		$	(4	)
Net income attributable to Parent		$	0			$	0			$	0			$	0			$	0
Net income attributable to the Partnership		$	555			$	631			$	635			$	618			$	642

 

		Year Ended December 31,
		2022E(4)				2023E				2024E				2025E				2026E
		(Financial metrics in millions, except per Common Unit figures)
Net Income		$	563			$	642			$	646			$	628			$	646
Depreciation		$	50			$	52			$	53			$	54			$	55
Contract asset amortization		$	15			$	15			$	15			$	15			$	15
Loss (gain) from disposition of fixed assets		$	0			$	0			$	0			$	0			$	0
Allowance oil reduction to net realizable value		$	0			$	0			$	0			$	0			$	0
Interest expense and income tax expense, net		$	64			$	74			$	73			$	76			$	79
Distributions from equity investments		$	(33	)		$	(34	)		$	(33	)		$	(33	)		$	(32	)
Equity method distributions included in other income		$	505			$	516			$	531			$	537			$	561
Income from equity investments		$	(370	)		$	(458	)		$	(463	)		$	(469	)		$	(491	)
Adjusted EBITDA(1)		$	794			$	806			$	821			$	808			$	833
Adjusted EBITDA attributable to non-controlling interests		$	(8	)		$	(11	)		$	(12	)		$	(11	)		$	(5	)
Consolidated Partnership Adjusted EBITDA(1)		$	786			$	795			$	809			$	797			$	828
Partnership finance receivable, interest and income taxes paid(2)		$	(59	)		$	(68	)		$	(67	)		$	(69	)		$	(71	)
Partnership share of volume deficiency payments		$	6			$	0			$	0			$	0			$	0
Partnership share of maintenance capital expenditures		$	(30	)		$	(21	)		$	(19	)		$	(18	)		$	(21	)
Series A Convertible Preferred Coupon Payments		$	(48	)		$	(48	)		$	(48	)		$	(48	)		$	(48	)
Reimbursements from Parent included in partners’ capital		$	1			$	0			$	0			$	0			$	0
Cash Available for Distribution(3)		$	656			$	658			$	676			$	662			$	688
Distributions per Common Unit per Year		$	1.20			$	1.20			$	1.20			$	1.20			$	1.20
Yearly Coverage Ratio		1.39x				1.39x				1.43x				1.40x				1.46x
Growth Capital Expenditure		$	8			$	27			$	37			$	24			$	40

 

(1)

Adjusted EBITDA, a non-GAAP financial measure, is defined by the Partnership as net income before income taxes, interest expense, interest income, gain or loss from dispositions of fixed assets, allowance oil reduction to net realizable value, loss from revision of asset retirement obligation, and depreciation,

 

36

amortization and accretion, plus cash distributed to the Partnership from equity method investments for the applicable period, less equity method distributions included in other income and income from equity method investments. Consolidated Partnership Adjusted EBITDA is defined as Adjusted EBITDA attributable to the Partnership less Adjusted EBITDA attributable to noncontrolling interests.

(2)	Finance receivables represent the annual net payment of $140 million that the Partnership receives in relation to certain logistics assets at the Shell Norco Manufacturing Complex.

(3)

Cash Available for Distribution, a non-GAAP financial measure, is defined as Adjusted EBITDA attributable to the Partnership less maintenance capital expenditures attributable to the Partnership, net interest paid by the Partnership, cash reserves, income taxes paid and distributions on the Preferred Units, plus net adjustments from volume deficiency payments attributable to the Partnership, reimbursements from Parent included in partners’ capital, principal and interest payments received on financing receivables and certain one-time payments received. Cash Available for Distribution will not reflect changes in the Partnership’s working capital balances. The term “maintenance capital expenditures” is defined as cash expenditures, including expenditures for (a) the acquisition (through an asset acquisition, merger, stock acquisition, equity acquisition or other form of investment) by the Partnership or any of its subsidiaries of existing assets or assets under construction, (b) the construction or development of new capital assets by the Partnership or any of its subsidiaries, (c) the replacement, improvement or expansion of existing capital assets by the Partnership or any of its subsidiaries or (d) a capital contribution by the Partnership or any of its subsidiaries to a person that is not a subsidiary in which the Partnership or any of its subsidiaries has, or after such capital contribution will have, directly or indirectly, an equity interest, to fund the Partnership or such subsidiary’s share of the cost of the acquisition, construction or development of new, or the replacement, improvement or expansion of existing, capital assets by such person, in each case if and to the extent such acquisition, construction, development, replacement, improvement or expansion is made to maintain, over the long-term, the operating capacity or operating income of the Partnership and its subsidiaries, in the case of clauses (a), (b) and (c), or such person, in the case of clause (d), as the operating capacity or operating income of the Partnership and its subsidiaries or such person, as the case may be, existed immediately prior to such acquisition, construction, development, replacement, improvement, expansion or capital contribution. For purposes of this definition, “long-term” generally refers to a period of not less than twelve months.

(4)	Includes actual results through March 31, 2022, and projected results for the remainder of 2022.

EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW, NONE OF PARENT, THE PARTNERSHIP, THE GENERAL PARTNER OR ANY OF THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS OR MANAGERS INTENDS TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS PRESENTED ABOVE TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IF ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS ARE NO LONGER APPROPRIATE.

Opinion of Financial Advisor to the Conflicts Committee

The Conflicts Committee engaged Intrepid to act as its financial advisor in connection with evaluating the Proposed Transaction. As part of that engagement, the Conflicts Committee requested that Intrepid evaluate the fairness, from a financial point of view, of the Merger Consideration in the Proposed Transaction to be received by the Public Unitholders. On July 25, 2022, Intrepid delivered to the Conflicts Committee its oral opinion, confirmed by its delivery of a written opinion dated as of the same date, that, as of the date thereof, and based upon and subject to the assumptions, procedures, factors, qualifications, limitations and other matters set forth in Intrepid’s written opinion, the Merger Consideration in the Proposed Transaction to be received by the Public Unitholders pursuant to the Merger Agreement is fair, from a financial point of view, to the Public Unitholders.

 

37

The full text of Intrepid’s written opinion, dated July 25, 2022, which sets forth, among other things, certain of the assumptions made, procedures followed, matters considered, and the qualifications and limitations with respect to the review undertaken by Intrepid, is attached as Annex B to this information statement and is incorporated by reference into this section.

Intrepid provided its opinion solely for the information and benefit of the Conflicts Committee (in its capacity as such) in connection with its evaluation of the Proposed Transaction. The opinion does not address the Partnership’s underlying business decision to enter into the Merger Agreement or the relative merits of the Proposed Transaction as compared with any other strategic alternative that may be available to the Partnership. The opinion is not intended to be and does not constitute a recommendation to any Limited Partner as to how such Limited Partner should act with respect to the Proposed Transaction or any other matter. In addition, the opinion was not rendered to or for the benefit of, and does not confer rights or remedies upon, any person other than the Conflicts Committee (including any equity holders, creditors, bondholders or other constituencies of the Partnership, the General Partner or Parent). This summary is qualified in its entirety by reference to the full text of the opinion.

Intrepid’s opinion was necessarily based upon business, market, economic, regulatory and other conditions as they existed on, and were evaluated as of, July 25, 2022. Intrepid assumes no responsibility for updating, revising or reaffirming its opinion based on developments, circumstances or events occurring, or information made available to it, after July 25, 2022. Intrepid’s opinion did not express any opinion as to any equity securities or debt securities of the Partnership (except as set forth in the last paragraph of the written opinion), Parent or Holdings or the price, trading range or volume at which any securities will trade at any time.

In connection with rendering its opinion, Intrepid, among other things:

 

•

reviewed a draft of the Merger Agreement, dated July 23, 2022;

 

•

reviewed the Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated as of April 1, 2020;

 

•

reviewed certain presentations to the Conflicts Committee from management of the General Partner;

 

•

reviewed certain publicly available information relating to the Partnership that Intrepid deemed relevant, including the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, Quarterly Report on Form 10-Q for the three months ended March 31, 2022 and certain Current Reports on Form 8-K, in each case as filed with or furnished to the SEC by the Partnership;

 

•

reviewed certain non-public projected financial data and related assumptions of the Partnership, as prepared and furnished to Intrepid by management of the General Partner;

 

•

reviewed the Partnership’s business plan with management of the General Partner, including a detailed review of certain material growth projects and commercial contracts and legal, environmental, regulatory and other matters;

 

•

reviewed certain recent announcements made by the Partnership;

 

•

discussed past and current operations and operational projections of the Partnership with management of the General Partner (including their views on the risks and uncertainties in achieving the projections set forth in the forecasts provided);

 

•

discussed the strategic rationale for, and potential benefits of, the Proposed Transaction with management of the General Partner;

 

•

performed discounted cash flow analyses based on forecasts and other data provided by management of the General Partner;

 

38

•

reviewed and analyzed publicly available historical and current financial information, share and unit price data and broker research estimates with respect to certain public companies with operations and assets considered comparable to the Partnership; and

 

•

conducted such other studies and investigations, performed such other analyses and examinations, reviewed such other information and considered such other factors that Intrepid deemed appropriate for purposes of providing its opinion.

For purposes of its analyses and opinion, Intrepid assumed and relied upon the accuracy and completeness of all of the foregoing information and any other financial, accounting, legal, operational, tax and other information provided to, discussed with or reviewed by Intrepid, or that was publicly available, and Intrepid has not assumed any responsibility for independent verification of the accuracy or completeness of any such information. Intrepid further relied upon the assurances of management of the General Partner that they are not aware of any facts that would make such information inaccurate, incomplete or misleading. With respect to financial forecasts and projections of the Partnership, Intrepid relied, with the Conflicts Committee’s consent, upon the assurances of management of the General Partner that such data has been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of the General Partner as to the future financial performance of the Partnership, under the assumptions reflected therein. The opinion expressed no view as to such financial forecasts or any judgments, estimates or assumptions on which they are based.

Intrepid relied, with the Conflicts Committee’s consent, upon the assessments of management of the General Partner as to (i) the potential impact on the Partnership of market and other trends and prospects for, and governmental, regulatory and legislative matters relating to or otherwise affecting, the oil and gas industry, including commodity pricing and supply and demand for oil and gas, and (ii) existing and future contracts and relationships, agreements and arrangements that are necessary or desirable for the operation of the Partnership. Intrepid undertook no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Partnership is or may be a party or is or may be subject. Intrepid also assumed that there were no material changes in the liabilities, financial condition, results of operations, business or prospects of or relating to the Partnership since the date of the latest information relating to the Partnership made available to Intrepid. Intrepid did not conduct a physical inspection of the properties and facilities of the Partnership and did not make an independent evaluation or appraisal of the assets or liabilities (including any contingent, derivative or other off-balance sheet assets and liabilities) of the Partnership, the potential realization of the value of the Partnership or the solvency or fair value of the Partnership, the General Partner or any of the potential parties to the Merger under any state or federal laws relating to bankruptcy, insolvency or similar matters, nor was Intrepid furnished with any such evaluations or appraisals, nor does Intrepid assume any responsibility to obtain any such evaluations, appraisals or physical inspections. Estimates of values of companies and assets do not purport to be appraisals or necessarily reflect the prices at which companies or assets may actually be sold. Because such estimates are inherently subject to uncertainty, Intrepid assumes no responsibility for their accuracy.

In rendering its opinion, Intrepid assumed, in all respects material to its analysis and with the Conflicts Committee’s consent, that the representations and warranties of each party contained in the Merger Agreement are true and correct, that each party will perform all of the covenants and agreements required to be performed by it under the Merger Agreement and that the Proposed Transaction will be consummated on the terms described in the Merger Agreement, in each case in the draft form reviewed by Intrepid, without any waiver or modification of any material terms or conditions contained therein. Intrepid assumed that all governmental, regulatory or other consents, approvals or releases, and any financing necessary for the consummation of the Proposed Transaction will be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on the parties to the Proposed Transaction, their equity holders or the consummation of the Proposed Transaction or materially reduce the benefits of the Proposed Transaction to the Partnership. Intrepid assumed that the Proposed Transaction will be consummated in a manner that complies with all applicable federal, state and local statutes, rules and regulations. Intrepid assumed that the Partnership and the Conflicts Committee have relied

 

39

upon the advice of their counsel, independent accountants and other advisors (other than Intrepid) as to all legal, financial reporting, tax, accounting and regulatory matters with respect to the Partnership, the Merger Agreement and the Proposed Transaction. Intrepid assumed that the final executed and delivered versions of all documents reviewed by it in draft form will conform in all material respects to the drafts reviewed by it.

Intrepid was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness, from a financial point of view, of the Merger Consideration to be received by the Public Unitholders in the Proposed Transaction. Intrepid was not asked to, nor did it express any view on, and its opinion does not address, any other terms, conditions, aspects or implications of the Proposed Transaction or any agreements, arrangements or understandings entered into in connection therewith or otherwise, including the structure or timing of the Proposed Transaction and the covenants of the Partnership under the Merger Agreement. Intrepid’s opinion does not address any financing transactions associated with the Proposed Transaction. In addition, Intrepid did not express any view on, and its opinion does not address, the fairness (financial or otherwise) of the Proposed Transaction to any individual subsidiary of the Partnership or any creditors, bondholders or other constituencies of the Partnership (other than to the Public Unitholders) or its subsidiaries, or the fairness (financial or otherwise) of the amount or nature of, or any other aspects relating to, any compensation to be paid to any officers, directors or employees of any parties to the Proposed Transaction, or any class of such persons, whether relative to the Merger Consideration or otherwise. Intrepid’s opinion does not address the relative merits of the Proposed Transaction as compared to any other transaction or business strategy in which the Partnership might engage or the merits of the underlying decision by the Partnership to engage in the Proposed Transaction.

Intrepid’s opinion does not address whether Parent has sufficient cash, available lines of credit or other sources of funds to enable it to consummate the Proposed Transaction. Intrepid’s opinion does not address accounting, legal, actuarial, regulatory or tax matters. Intrepid is not a legal, tax or bankruptcy advisor. In preparing the opinion, Intrepid did not take into account any tax consequences of the Proposed Transaction to any Public Unitholders. Each person should seek legal, regulatory, accounting and tax advice based on his, her or its particular circumstances from independent advisors regarding the evaluation and impact of any transactions or matters described in Intrepid’s opinion. Intrepid’s opinion does not constitute a solvency opinion and does not address the solvency or financial condition of the Partnership or any of the potential parties to the Proposed Transaction. The opinion expressly disclaims any responsibility or liability relating to counterparty credit risk, and the opinion assumes that, for purposes of the opinion, each of the Partnership and the counterparties to the Proposed Transaction (including Parent and Holdings) is and will continue to be a solvent going concern with a stable and sound financial condition.

In arriving at its opinion, Intrepid did not attribute any particular weight to any particular analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Several analytical methodologies were employed by Intrepid in its analyses, and no one single method of analysis should be regarded as critical to the overall conclusion reached by Intrepid. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. Accordingly, Intrepid believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and all factors in their entirety, could create a misleading or incomplete view of the evaluation process underlying its opinion. The conclusion reached by Intrepid, therefore, is based on the application of Intrepid’s own experience and judgment to all analyses and factors considered by it, taken as a whole. Intrepid’s opinion was approved by the fairness opinion committee of Intrepid.

Overview of Material Financial Analyses

Public Company Peer Group Trading Analysis

Intrepid performed a public company peer group trading analysis of the Partnership by reviewing and comparing the market values and trading yields, as well as certain financial information and metrics, of the    

 

40

following publicly traded companies that, in Intrepid’s experience and professional judgment, may have certain characteristics that are similar to those of the Partnership:

Liquids Transportation and Storage Peers:

 

•

Genesis Energy, L.P. (GEL)

 

•

Holly Energy Partners, L.P. (HEP)

 

•

Magellan Midstream Partners, L.P. (MMP)

 

•

NuStar Energy L.P. (NS)

 

•

PBF Logistics LP (PBFX)

Diversified Peers:

 

•

Enbridge Inc. (ENB)

 

•

Enterprise Products Partners L.P. (EPD)

 

•

Energy Transfer LP (ET)

 

•

Kinder Morgan, Inc. (KMI)

 

•

MPLX LP (MPLX)

 

•

ONEOK, Inc. (OKE)

 

•

Plains All American Pipeline, L.P. (PAA)

 

•

The Williams Companies, Inc. (WMB)

Although the trading comparables were compared to the Partnership for purposes of this analysis, no company used in the public company peer group trading analysis is identical or directly comparable to the Partnership. Accordingly, Intrepid believes that purely quantitative analyses are not, in isolation, determinative in the context of the Proposed Transaction and that qualitative judgments concerning differences between the financial and operating characteristics and prospects of the Partnership and the trading comparables also are relevant. In order to calculate peer group trading multiples, Intrepid relied upon such companies’ publicly available filings with the SEC and equity research analyst estimates.

For each of the public company peer group companies analyzed, Intrepid applied the following metrics:

 

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LP Distributable Cash Flow Yield, which is calculated as limited partner distributable cash flow per unit divided by limited partner equity value per unit. Distributable cash flow (“DCF”) is calculated as EBITDA less maintenance capital expenditures, less interest expense, less state and local taxes and other cash flow adjustments (each company’s definition of EBITDA and DCF may vary). LP distributable cash flow is calculated as DCF less the DCF allocation to the economic general partner interest and the incentive distribution rights, as applicable; and

 

•

LP Distribution Yield, which is calculated as limited partner cash distribution per unit divided by limited partner equity value per unit.

 

		LP DCF Yield								Distribution Yield
LT&S		2022E				2023E				2022E
Genesis Energy, L.P.			23.0%				29.7%				7.5%
Holly Energy Partners, L.P.			14.3%				14.8%				8.3%
Magellan Midstream Partners, L.P.			10.7%				11.4%				8.5%
NuStar Energy L.P.			22.3%				22.1%				11.1%
PBF Logistics LP			20.6%				22.0%				9.0%

 

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		LP DCF Yield								Distribution Yield
Diversified		2022E				2023E				2022E
Enbridge Inc.			9.6%				9.7%				6.2%
Energy Transfer LP			23.5%				23.9%				9.1%
Enterprise Products Partners L.P.			12.9%				13.1%				7.4%
Kinder Morgan, Inc.			12.6%				13.0%				6.3%
MPLX LP			15.2%				15.6%				9.5%
ONEOK, Inc.			10.5%				11.3%				6.5%
Plains All American Pipeline, L.P.			18.1%				24.6%				8.2%
The Williams Companies, Inc.			10.5%				10.9%				5.3%

 

		LP DCF Yield								Distribution Yield
Company		2022E				2023E				2022E
Mean - All (13 Companies)			15.7%				17.1%				7.9	%
Median - All (13 Companies)			14.3%				14.8%				8.2	%
Mean - LT&S (5 Companies)			18.2%				20.0%				8.9	%
Median - LT&S (5 Companies)			20.6%				22.0%				8.5	%
Mean - Diversified (8 Companies)			14.1%				15.3%				7.3	%
Median - Diversified (8 Companies)			12.8%				13.1%				6.9	%

The table below includes relevant yield ranges selected by Intrepid based on the market trading yields of the trading comparables set forth above and Intrepid’s professional judgment and the implied Common Unit price derived from such ranges.

 

Metrics		Range				Implied Common Unit Price
LP DCF / Unit (2022E)			14.75% - 12.75%				$12.16 - $14.06
LP DCF / Unit (2023E)			15.25% - 13.25%				$11.52 - $13.26
LP Distribution / Unit (2022E)			8.50% - 7.00%				$14.12 - $17.14

At the direction of the Conflicts Committee, Intrepid evaluated the LP DCF / Unit metrics set forth above to reflect a normalized distribution policy of Colonial Enterprises, Inc. (“Colonial”), the parent of Colonial Pipeline Company in which the Partnership owns a 16.125% interest. At the direction of the Conflicts Committee and for informational purposes only, Intrepid calculated the implied Common Unit price excluding a normalized distribution policy at Colonial, which equated to $11.26 to $13.02 and $10.97 to $12.62 on a 2022E and 2023E basis, respectively.

Based on its review of the public company peer groups and Intrepid’s professional judgment, Intrepid calculated an implied Common Unit price range of $12.60 to $14.82 per Common Unit based on the averages of the respective minimum and maximum values as derived by each of the methodologies.

Discounted Cash Flow Analysis – Levered Free Cash Flow

For purposes of this analysis, “levered free cash flow” is calculated as distributable cash flow less growth capital expenditures. Intrepid performed discounted cash flow analysis to calculate the estimated present value of: (i) the levered free cash flow the Partnership is projected to generate, on a per unit basis, for the five-year period beginning with the twelve months ending December 31, 2022, based on the Projections, and (ii) an implied terminal Common Unit value.

Using an estimated cost of equity capital of the Partnership ranging from 12.50% to 7.75%, Intrepid discounted: (i) the Partnership’s estimated levered free cash flow per unit, and (ii) a range of illustrative terminal Common Unit values, calculated by applying a range of LP DCF / Unit yields of 15.25% to 13.25% to terminal year

 

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LP DCF / Unit. Intrepid derived such estimated cost of equity capital range by application of the capital asset pricing model and such terminal yield range using its professional judgment and experience, taking into account, among other things, an analysis of the Partnership and selected comparable companies operating with similar asset profiles. The analysis resulted in an implied equity value per Common Unit range of $12.51 to $15.87.

Discounted Cash Flow Analysis – Limited Partner Distributions per Unit

Using an estimated cost of equity capital ranging from 12.50% to 7.75%, Intrepid discounted: (i) the Partnership’s estimated limited partnership distributions per unit, and (ii) a range of illustrative terminal Common Unit values, calculated by applying a range of LP Distribution / Unit yields of 8.50% to 7.00% to terminal year LP Distribution / Unit. Intrepid derived such estimated cost of equity capital range by application of the capital asset pricing model and such terminal yield range using its professional judgment and experience, taking into account, among other things, an analysis of the Partnership and selected comparable companies. The analysis resulted in an implied equity value per Common Unit range of $12.37 to $16.81.

Precedent Transactions

Intrepid reviewed selected publicly available information for recent affiliate transactions involving the buy-in of limited partnerships and limited liability companies, although Intrepid noted that none of the selected transactions were directly comparable to the Merger:

 

Unaffected Date		Buyer		Target		FY+1 LP DCF Yield				FY+1 LP DPU Yield
5/13/2022		Diamondback Energy, Inc.		Rattler Midstream LP			11.3	%			8.0	%
1/11/2022		Hartree Partners, LP		Sprague Resources LP			12.6	%			9.2	%
10/25/2021		Phillips 66		Phillips 66 Partners LP			10.6	%			4.2	%
10/8/2021		Ergon, Inc.		Blueknight Energy Partners L.P.			9.0	%			3.7	%
8/4/2021		BP Pipelines (North America), Inc.		BP Midstream Partners LP			11.2	%			9.8	%
2/4/2021		Chevron Corporation		Noble Midstream Partners, LP			21.3	%			6.0	%
10/2/2020		TC Energy Corporation		TC PipeLines, LP			13.5	%			8.8	%
2/25/2020		Equitrans Midstream Corporation		EQM Midstream Partners LP			21.6	%			5.2	%
8/27/2019		Blackstone Infrastructure Partners		Tallgrass Energy, LP			10.6	%			10.0	%
11/7/2018		Western Gas Equity Partners, LP		Western Gas Partners, LP			8.5	%			8.1	%
10/19/2018		EnLink Midstream, LLC		EnLink Midstream Partners, LP			9.2	%			8.5	%
10/17/2018		Valero Energy Corporation		Valero Energy Partners LP			7.0	%			5.7	%
9/18/2018		Dominion Energy, Inc.		Dominion Energy Midstream Partners, LP			6.6	%			n/a
8/1/2018		Energy Transfer Equity, L.P.		Energy Transfer Partners, L.P.			12.5	%			9.8	%
7/9/2018		ArcLight Capital Partners LLC		TransMontaigne Partners L.P.			9.3	%			7.8	%
5/16/2018		Enbridge Inc.		Spectra Energy Partners, LP			9.8	%			8.7	%
5/16/2018		Enbridge Inc.		Enbridge Energy Partners, L.P.			14.9	%			9.1	%
3/15/2018		The Williams Companies, Inc.		Williams Partners L.P.			7.6	%			6.4	%
2/7/2018		Tallgrass Energy GP		Tallgrass Energy Partners, LP			9.6	%			8.4	%
9/23/2016		Columbia Pipeline Group, Inc.		Columbia Pipeline Partners LP			4.9	%			4.7	%

Intrepid reviewed the LP Distributable Cash Flow Yield and LP Distribution Yield in the selected transactions, summarized in the table below.

 

		Transaction Metrics
		FY+1 LP DCF Yield				FY+1LP DPU Yield
75th Percentile			12.5	%			9.0	%
Mean			11.1	%			7.5	%
Median			10.2	%			8.1	%
25th Percentile			8.9	%			5.9	%

 

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The table below includes relevant yield ranges selected by Intrepid based on the selected transactions set forth above and Intrepid’s professional judgment and the implied Common Unit price derived from such ranges.

 

Metrics		Range				Implied Common Unit Price
LP DCF / Unit (2022E)			12.00% - 9.00%				$14.94 - $19.92
LP Distribution / Unit (2022E)			9.00% - 6.00%				$13.33 - $20.00

At the direction of the Conflicts Committee, Intrepid evaluated the LP DCF / Unit metric set forth above to reflect a normalized distribution policy at Colonial. At the direction of the Conflicts Committee and for informational purposes only, Intrepid calculated the implied Common Unit price excluding a normalized distribution policy at Colonial, which equated to $13.84 to $18.45.

Based on its review of the selected transactions and Intrepid’s professional judgment, Intrepid calculated an implied Common Unit price range of $14.14 to $19.96 per Common Unit based on the averages of the respective minimum and maximum values as derived by each of the methodologies.

Precedent Premiums Paid

Intrepid prepared a premiums paid analysis based upon comparable MLP buy-in transactions, as compared to the proposal received from Parent. Intrepid analyzed the implied premium or discount from the Parent’s proposal versus both (i) MLP buy-in transactions with 100% cash consideration and (ii) MLP buy-in transactions with cash and/or equity consideration. The following unaffected reference metrics were used to generate comparisons of the Parent’s proposal against the various precedent transactions: T-1, 10-day VWAP, 20-day VWAP, 30-day VWAP, 60-day VWAP, 90-day VWAP, 52-week high and 52-week low. Based on its premiums paid analysis and Intrepid’s professional judgment, Intrepid derived a range of premiums to the Partnership’s unaffected Common Unit price as of February 10, 2022, of 10.0% to 15.0% and calculated an implied Common Unit price range of $14.18 to $14.82 per Common Unit.

Other Presentations by Intrepid

In addition to the presentation made to the Conflicts Committee on July 25, 2022, the date on which Intrepid delivered its opinion as described above, Intrepid made other presentations to the Conflicts Committee on March 8, 2022, March 28, 2022, April 12, 2022, April 25, 2022, May 6, 2022, June 16, 2022, June 28, 2022 and July 11, 2022, which are referred to as the preliminary Intrepid presentations. Copies of the preliminary Intrepid presentations have been attached as exhibits to the Schedule 13E-3. These written presentations and Intrepid’s written opinion will be available for any interested unitholder of the Partnership to inspect at the Partnership’s executive offices during regular business hours. None of the preliminary Intrepid presentations, alone or together, constitutes an opinion of Intrepid with respect to the Merger Consideration.

The preliminary illustrative draft materials dated March 8, 2022 contained, among other information, a situation overview, market trading data, implied premiums analysis and preliminary transaction timeline and next steps.

The preliminary illustrative draft materials dated March 28, 2022 contained, among other information, market trading data, a summary of Intrepid’s due diligence, detail on the Partnership’s assets, a review of the financial projections of management of the General Partner and a preliminary illustrative valuation analysis.

The preliminary illustrative draft materials dated April 12, 2022 contained, among other information, a review of the updates to the financial projections of management of the General Partner, a preliminary illustrative valuation analysis, preliminary illustrative sensitivity analyses and market trading data and implied premiums analysis.

 

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The preliminary illustrative draft materials dated April 25, 2022 contained, among other information, market trading data, implied premiums and precedent premiums analysis and a preliminary illustrative valuation analysis.

The preliminary illustrative draft materials dated May 6, 2022 contained, among other information, an implied premiums analysis.

The preliminary illustrative draft materials dated June 16, 2022 contained, among other information, a comparison of the updated financial projections of management of the General Partner relative to the prior financial projections.

The preliminary illustrative draft materials dated June 28, 2022 contained, among other information, a review of the updates to the financial projections of management of the General Partner, a preliminary illustrative valuation analysis and market trading data.

The preliminary illustrative draft materials dated July 11, 2022 contained, among other information, a review of the financial projections of management of the General Partner and a preliminary illustrative valuation analysis.

Each of the analyses performed in these preliminary illustrative draft presentations was subject to further updating and subject to the final analyses presented to the Conflicts Committee on July 25, 2022 by Intrepid. Each of these analyses was necessarily based on financial, economic, market and other conditions as they existed and as could be evaluated by Intrepid as of the dates on which Intrepid performed such analyses. Accordingly, the results of the financial analyses may have differed due to changes in those conditions and other information, and not all of the written and oral presentations contained all of the financial analyses included in the July 25, 2022 presentation.

General

As described above in this section, the preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Intrepid’s opinion. In arriving at its fairness determination, Intrepid considered the results of all of its analyses and, except as otherwise described in Intrepid’s opinion, did not attribute any particular weight to any factor or analysis considered by it. Intrepid made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses taken as a whole. No company or transaction used in the above analyses as a comparison is directly comparable to the Partnership, Parent or the Merger. Accordingly, these analyses must take into account differences in the financial and operating characteristics of the selected comparable companies and differences in the structure and timing of the selected transactions and other factors that would affect the public trading value and acquisition value of the companies considered.

Intrepid prepared these analyses for purposes of Intrepid providing its opinion only to the Conflicts Committee as to the fairness, from a financial point of view, of the Merger Consideration to be received by the Public Unitholders in the Proposed Transaction. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Partnership, the General Partner, Intrepid or any other person assumes responsibility if future results are materially different from those forecasts.

 

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As described above, Intrepid’s opinion to the Conflicts Committee was only one of many factors taken into consideration by the Conflicts Committee and should not be viewed as determinative of the views of the Conflicts Committee in making its determination to approve the Proposed Transaction. The foregoing summary does not purport to be a complete description of the analyses performed by Intrepid in connection with its fairness opinion and is qualified in its entirety by reference to the written opinion of Intrepid attached as Annex B to this information statement.

Miscellaneous

Intrepid and its affiliates, as part of their investment banking business, are regularly engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, private placements and other transactions as well as for real estate, corporate and other purposes. Intrepid and its affiliates also engage in advisory work, private equity activities, underwriting and financing, principal investing, investment management and other financial and non-financial activities and services for various persons and entities.

Intrepid and its affiliates and employees, and funds or other entities in which they invest or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in (i) equity, debt and other securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments (including bank loans and other obligations) of the Partnership, Parent, Shell, any of their respective affiliates and third parties or any of the other parties to the Proposed Transaction, or (ii) any currency or commodity that may be involved in the Proposed Transaction and other matters otherwise contemplated by the Merger Agreement for the accounts of Intrepid, its affiliates, employees and their customers.

Intrepid acted as financial advisor to the Conflicts Committee in connection with, and participated in certain of the negotiations leading to, the Proposed Transaction. Intrepid may in the future provide certain investment banking services to the Partnership, Parent, Shell and/or their affiliates, for which Intrepid may receive compensation.

Intrepid was engaged by the Conflicts Committee to act as its financial advisor in connection with an evaluation of the Proposed Transaction by entering into an engagement letter. The engagement letter between the Conflicts Committee and Intrepid provides for an opinion fee of $1,000,000, which has been paid to Intrepid by the Partnership and was earned by Intrepid upon delivery, regardless of the conclusion reached by Intrepid. The Intrepid engagement letter also provides for a financial advisory fee of $500,000, which was paid upon execution of the engagement letter, and a transaction fee of $1,500,000, which becomes payable upon the consummation of the Proposed Transaction. The engagement letter also provides for a discretionary fee in an amount not to exceed $1,000,000, to be determined by the Conflicts Committee at its sole discretion, payable upon the closing of the Proposed Transaction. In addition, the Partnership has agreed to reimburse Intrepid for certain of its expenses, including certain attorneys’ fees and disbursements (which shall not exceed $100,000 in the aggregate without the Conflicts Committee’s consent), and to indemnify Intrepid and related persons against various liabilities, including certain liabilities under the federal securities laws. During the past two years, no material relationship has existed between Intrepid and its affiliates and the Partnership, Parent or Shell or any of their respective affiliates pursuant to which compensation was received by Intrepid or its affiliates as a result of such a relationship. The engagement letter includes a consent for use of Intrepid’s opinion in the Partnership’s SEC filings related to the Proposed Transaction, including this information statement.

The Conflicts Committee selected Intrepid as its financial advisor because it is a nationally recognized investment banking firm and is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for corporate and other purposes. The Conflicts Committee selected Intrepid to act as its financial advisor on the basis of Intrepid’s qualifications and expertise, knowledge of the energy industry, reputation in the investment community, independence and experience in transactions similar to the transactions described in the Merger Agreement, as well as familiarity with the Partnership.

 

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Position of the Shell Filing Parties as to the Fairness of the Merger

Under the SEC rules governing “going private” transactions, each of the Shell Filing Parties is an affiliate of the Partnership that is required to express its belief as to the fairness of the Merger to the Public Unitholders. The Shell Filing Parties are making the statements included in this section for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

The Shell Filing Parties believe that the Merger (which is the Rule 13e-3 transaction for which the Schedule 13E-3 was filed with the SEC) is substantively and procedurally fair to the Public Unitholders on the basis of the factors described in “Special Factors—Purposes and Reasons of the Shell Filing Parties for the Merger” and the additional factors described below.

The Shell Filing Parties did not participate in the deliberations of the Conflicts Committee regarding, or receive advice from either the Partnership’s or the Conflicts Committee’s legal or financial advisors as to, the fairness of the Merger to the Public Unitholders. None of the Shell Filing Parties has performed, or engaged a financial advisor to perform, any valuation or other analysis for the purpose of assessing the fairness of the Merger to the Public Unitholders. Based on the knowledge and analysis by the Shell Filing Parties of available information regarding the Partnership, as well as discussions with members of the General Partner’s senior management regarding the Partnership and its business and the factors considered by the GP Board discussed in this information statement in “Special Factors—Purposes and Reasons of the Shell Filing Parties for the Merger,” the Shell Filing Parties believe that the Merger is substantively and procedurally fair to the Public Unitholders. In particular, the Shell Filing Parties believe that the Merger is both substantively and procedurally fair to the Public Unitholders based on their consideration of the following factors, among others:

 

•

The Merger Consideration with respect to the Common Units constitutes an approximate 25% premium to the trailing 30-day VWAP as of February 10, 2022 (the last trading day prior to the time that Parent offered to acquire all of the Public Common Units), an approximate 23% premium to the closing price of the Common Units on February 10, 2022, and an approximate 13% premium to the trailing 30-day VWAP of the Common Units as of July 22, 2022 (the last trading day prior to the Conflicts Committee’s approval of the Merger).

 

•

The Merger Consideration is an all-cash amount with a premium, which the Shell Filing Parties believe provides greater value to the Public Unitholders than the long-term value of the Partnership as a publicly traded partnership, after taking into account the risks and challenges facing the Partnership’s current business and financial prospects.

 

•

The receipt of cash consideration eliminates downside risk associated with the continued ownership of the Common Units, including any possible decrease in the future revenues and cash available for distribution, growth or value of the Partnership following the Merger.

 

•

The Partnership’s base business being unable to sustain the prior distribution level, leading the Partnership to decrease its distribution by 35% in the second quarter of 2021 and to maintain its distribution at such lower level.

 

•

Further increases in market interest rates, which are expected, may adversely affect the attractiveness of the Common Units to investors compared to other financial instruments or alternate investment opportunities.

 

•

The Shell Filing Parties’ belief that investor sentiment increasingly disfavors MLP structures as compared to alternative structures and, as a result, the state of the MLP debt and equity capital markets will continue to present challenges for the Partnership to fund acquisitions and growth capital expenditures.

 

•

The terms of comparable recent MLP buy-in transactions, including the premium paid in such transactions.

 

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•

The Merger is not conditioned on Parent’s having to obtain any financing for the Merger Consideration.

 

•

The Written Consent executed and delivered by Holdings is sufficient to approve the Proposed Transaction on behalf of the Limited Partners, which increases certainty of Closing.

 

•

Certain terms of the Merger Agreement, principally:

 

•

provisions entitling the Partnership to an injunction or injunctions to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions of the Merger Agreement;

 

•

provisions requiring the General Partner to declare and cause the Partnership to pay regular quarterly cash distributions on the Common Units until the Effective Time, subject to certain specified criteria; and

 

•

provisions requiring Parent to reimburse the Partnership for out-of-pocket expenses up to $5.0 million in the event the Merger Agreement is terminated under certain circumstances.

 

•

The authorization of the Conflicts Committee to (i) consider, review, evaluate and analyze any potential conflicts that may exist among or between (A) the General Partner and its affiliates and (B) the Partnership and the Public Unitholders, arising in connection with the Proposed Transaction, (ii) perform appropriate due diligence on and valuation analyses with respect to the Proposed Transaction, (iii) consider, review, evaluate and analyze the terms and conditions of the Proposed Transaction submitted to the GP Board by an affiliate of Parent, on behalf of the Partnership and the Public Unitholders, (iv) negotiate the terms and conditions and any documentation of the Proposed Transaction on behalf of the Partnership and the Public Unitholders directly with Parent and its affiliates and the counsel and advisor to each of them, as the Conflicts Committee deems necessary or appropriate, in its sole discretion, (v) review and make such investigation of potential alternatives to the Proposed Transaction, including maintaining the status quo, as the Conflicts Committee deems necessary or appropriate, in its sole discretion, (vi) consult with, advise and/or direct management of the Partnership in connection with discussions and/or negotiations concerning potential terms and conditions of the Proposed Transaction, (vii) determine whether the Proposed Transaction is in the best interest of the Partnership and the Public Unitholders, and (viii) determine whether to approve, and to recommend that the GP Board approve, the Proposed Transaction, with any such approval by the Conflicts Committee constituting “Special Approval” for all purposes under the Partnership Agreement, including but not limited to Section 7.10(a) thereof.

 

•

The GP Board’s resolution that the Conflicts Committee would not have any duty (fiduciary or otherwise) to consider the interests of the General Partner or its controlling affiliates, including Parent, in its consideration of the Proposed Transaction.

 

•

The Conflicts Committee’s unanimous approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, and recommendation to the GP Board, which members of the Conflicts Committee have no economic interest or expectancy of an economic interest in the Shell Filing Parties following the Merger.

 

•

The other factors considered by the Conflicts Committee and the GP Board described in the section entitled “—Reasons for Approval of the Merger Agreement and the Merger by the Conflicts Committee and the GP Board.”

The Shell Filing Parties did not find it practicable to assign, nor did they assign, specific relative weights to the individual factors considered in reaching their conclusion as to fairness. The Shell Filing Parties also did not consider the liquidation value of the Partnership’s assets, and did not perform a liquidation analysis, because they consider the Partnership to be a viable going concern. Therefore, no appraisal of liquidation value was sought for purposes of valuing the Common Units, and the Shell Filing Parties believe that the liquidation value of the Common Units is irrelevant to a determination as to whether the Merger is fair to the Public Unitholders.

 

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The Shell Filing Parties did not consider the Partnership’s net book value, which is defined as total assets minus total liabilities, because the Shell Filing Parties believed that net book value was not a material indicator of the value of the Partnership as a going concern. The Shell Filing Parties also did not consider the liquidation value of the Partnership’s assets, and did not perform a liquidation analysis, because it considers the Partnership to be a viable going concern. Therefore, no appraisal of liquidation value was sought for purposes of valuing the Common Units, and the Shell Filing Parties believe that the liquidation value of the Common Units is irrelevant to a determination of whether the Merger is fair to the Public Unitholders. The Shell Filing Parties were not aware of, and thus did not consider, any firm offers or proposals made by any unaffiliated person during the past two years for: (i) a merger or consolidation of the Partnership with another company; (ii) the sale or transfer of all or substantially all of the Partnership’s assets; or (iii) the purchase of securities of the Partnership that would enable such person to exercise control of or significant influence over the Partnership. The Shell Filing Parties are not aware of, and thus did not consider, any purchases by the Partnership of Common Units during the past two years. In any event, the Shell Filing Parties have no intention of selling their Common Units beneficially owned by them, and therefore did not consider the possibility that any such offers might be made in reaching their conclusion as to fairness.

While the Shell Filing Parties considered the trading history of the Common Units and noted that at various times, this trading history reflected prices above the $15.85 to be paid for each Common Unit held by the Public Unitholders as Merger Consideration, the Shell Filing Parties concluded that this trading history was not important in determining present value in the light of the Partnership’s current business operations and future prospects.

The Shell Filing Parties’ consideration of the factors described above reflects their assessment of the fairness of the Merger. The Shell Filing Parties implicitly considered the value of the Partnership in a sale as a going concern by taking into account the Partnership’s current and anticipated business, financial conditions, results of operations, prospects and other forward-looking matters. The Shell Filing Parties did not, however, explicitly calculate a stand-alone going concern value of the Partnership because the Shell Filing Parties believe that going concern value is not an appropriate method of determining the value of the Common Units for purposes of the Merger. In the light of the fact that the Shell Filing Parties already have, and will continue to have, control of the Partnership, and that the Shell Filing Parties continue to desire to retain their Common Units, the Shell Filing Parties do not believe that it would be appropriate for the Public Common Units to be valued on a basis that includes a control premium.

The foregoing discussion of the information and factors considered and weight given by the Shell Filing Parties is not intended to be exhaustive, but includes the material factors considered by the Shell Filing Parties. The Shell Filing Parties’ views as to the fairness of the Merger should not be construed as a recommendation to Common Unitholders with respect to the Merger Agreement. Other than the GP Board, the Shell Filing Parties did not make any recommendation as to how the Limited Partners should vote their limited partner interests on the Merger Agreement and the Merger.

Purposes and Reasons of the Shell Filing Parties for the Merger

Under the SEC rules governing “going private” transactions, each of the Shell Filing Parties is an affiliate of the Partnership that is required to express its purpose and reasons for the Merger to the Public Unitholders. The Shell Filing Parties are making the statements included in this section for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

If the Merger is completed, the Partnership will become an indirect wholly owned subsidiary of Parent. For the Shell Filing Parties, the purpose of the Merger is to acquire 100% ownership of the Partnership’s assets and to bear the rewards and risks of such ownership after the Common Units cease to be publicly traded. The Shell Filing Parties noted that market trends have led to numerous transactions involving MLPs, including buy-ins of MLPs by their corporate sponsors, acquisitions of MLPs by third parties, conversions of MLPs to corporations

 

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for federal income tax and state law purposes and simplifications of MLPs in which incentive distribution rights are modified or eliminated to improve the MLPs’ cost of capital. The overall result of these transactions, combined with a lack of initial public offerings by MLPs in recent years, has been a significant reduction in the number of outstanding MLPs. Additionally, the Partnership’s base business was unable to sustain prior distribution levels, leading the Partnership to decrease its distribution by 35% in the second quarter of 2021 and to maintain its distribution at such lower level. The Shell Filing Parties explored the feasibility of acquiring the Partnership utilizing the limited call right included in the Partnership Agreement, which would allow Parent to acquire the outstanding Public Common Units at a specified price once it owned 75% of the total outstanding Common Units. In exploring such a transaction, Parent considered various options to reach the 75% threshold required to exercise the limited call right, including conversion of the Preferred Units and additional Common Unit purchases by Parent, either through a tender offer, individually negotiated purchases or open market purchases. Parent ultimately decided against pursuing a transaction with respect to the Partnership at that time due to continuing uncertain effects of the COVID-19 pandemic and overall market conditions on Parent and the Partnership. No such potential transaction was discussed with either management of the General Partner, the GP Board or the Conflicts Committee.

The Shell Filing Parties’ purposes and reasons for the Merger include, but are not limited to:

 

•

A Simplified Corporate Governance Structure. The Merger will result in Parent ultimately owning all of the equity interests of the Partnership through the holdings of its affiliates. The Merger will enable Parent to simplify its ownership of strategic infrastructure assets and allows for increased speed and flexibility of capital and portfolio actions for Parent’s strategies and assets.

 

•

Reduced Administrative Burden. Following the consummation of the Merger, Parent will indirectly own all of the equity interests of the Partnership. This is expected to allow synergies to occur through the streamlining of general and administrative expenses and eliminated costs associated with the Common Units being publicly traded, and for the Partnership to operate more efficiently and effectively as a private entity.

 

•

Eliminates the Concern over the Partnership’s Access to Equity Capital Markets. As a result of dislocation in the MLP market in recent years, the Partnership has had its cost of capital increase. This dislocation is further concerning because the ability to access equity capital markets to fund dropdowns was a key component in Parent’s determination to form the Partnership and pursue an initial public offering of its Common Units.

 

•

Guarantee of Parent’s Control over Key Assets. The Partnership’s assets include crude oil and refined petroleum products pipeline and terminal systems that are integral to the Parent’s operations. Following the consummation of the Merger, Parent will indirectly own all of the equity interests of the Partnership, which ensures Parent’s full operational control over the Partnership’s assets.

The Shell Filing Parties have undertaken to pursue the Merger at this time for the reasons described above. Although the Shell Filing Parties believe that there will be opportunities associated with their investment in the Partnership, the Shell Filing Parties realize that there are also substantial risks (including the risks and uncertainties relating to the prospects of the Partnership) and that such opportunities may never be fully realized. Further, following the Merger, there will be no trading market for the equity securities of the Partnership.

The Shell Filing Parties believe that structuring the Proposed Transaction as a merger transaction is preferable to other transaction structures because (i) it will enable Parent to acquire all of the outstanding Common Units at the same time and (ii) it represents an opportunity for the Partnership’s Public Unitholders to receive a premium for their Common Units. The Merger Consideration represents an approximate 25% premium to the trailing 30-day VWAP as of February 10, 2022 (the last trading day prior to the time that Parent offered to acquire all of the Public Common Units), an approximate 23% premium to the closing price of the Common Units on February 10, 2022, and an approximate 13% premium to the trailing 30-day VWAP of the Common Units as of July 22, 2022 (the last trading day prior to the Conflicts Committee’s approval of the Merger).

 

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Further, the Shell Filing Parties believe that structuring the Proposed Transaction as a merger transaction provides a prompt and orderly transfer of ownership of the Partnership in a single step, without the necessity of financing additional Common Unit purchases by Parent, either through a tender offer, individually negotiated purchases or open market purchases, and without incurring any additional transaction costs associated with such activities.

Primary Benefits and Detriments of the Merger

Benefits and Detriments to Public Unitholders

The primary benefits of the Merger to Public Unitholders, who will not have a continuing interest in the Partnership following the Merger, include the following:

 

•

the receipt by the Public Unitholders of $15.85 per Common Unit in cash, without interest, which represents an approximate 25% premium to the trailing 30-day VWAP as of February 10, 2022 (the last trading day prior to the time that Parent offered to acquire all of the Public Common Units,) an approximate 23% premium to the closing price of the Common Units on February 10, 2022, and an approximate 13% premium to the trailing 30-day VWAP of the Common Units as of July 22, 2022 (the last trading day prior to the Conflicts Committee’s approval of the Merger);

 

•

the avoidance of exposure to costs and dilution associated with the additional capital raising of the Partnership needed to support growth, address upcoming debt maturities, provide sufficient operating liquidity to and support other initiatives relating to the Partnership’s capital structure following the Merger; and

 

•

the elimination of downside risk associated with the continued ownership of the Common Units, including any possible decrease in the future revenues and cash available for distribution, growth or value of the Partnership following the Merger.

The primary detriments of the Merger to Public Unitholders, who will not have a continuing interest in the Partnership following the Merger, include the following:

 

•

Public Unitholders may have purchased Common Units prior to the price decline of the Common Units beginning in 2020;

 

•

Public Unitholders will cease to have an interest in the Partnership and, therefore, will no longer benefit from possible increases in the future revenues and cash available for distribution, growth or value of the Partnership or payment of distributions on Common Units, if any;

 

•

the all-cash aspect of the Merger Consideration does not allow the Public Unitholders to benefit from any synergies that may result from the Merger; and

 

•

the receipt of cash in exchange for Common Units pursuant to the Merger will generally be a taxable transaction to Public Unitholders and may result in taxable gains and income, depending on each Public Unitholder’s particular tax situation.

Benefits and Detriments to the Partnership and the Shell Filing Parties

The primary benefits of the Merger to the Partnership and the Shell Filing Parties include the following:

 

•

the Merger will enable Parent to focus on managing the assets of the Partnership for Parent;

 

•

the Shell Filing Parties (other than Merger Sub), as the owners of the Partnership, will become the beneficiaries of any savings associated with the reduced burden and administrative expenses of complying with the substantive requirements that federal securities laws impose on public companies;

 

•

the value of Parent’s equity investment could increase because of possible increases in future revenues and cash flow, increases in the underlying value of the Partnership or the payment of distributions, if any, that would accrue to Parent; and

 

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•

the Merger eliminates the concern that an MLP structure may no longer be the most cost-efficient way to fund Parent’s future midstream business.

The primary detriments of the Merger to the Partnership and the Shell Filing Parties include the following:

 

•

the loss of a public market as a reference point for the value of the Partnership’s assets;

 

•

as a result of the Merger, Parent will lose the Public Common Units as a potential acquisition currency;

 

•

the Partnership’s growth forecasts may not be realized, which could result in the future impairment of Parent’s investment in the Partnership; and

 

•

the potential benefits sought in the Merger may not be realized.

Interests of the Directors and Executive Officers of the General Partner in the Merger

In reading this information statement, Public Unitholders should be aware that some of the General Partner’s directors and executive officers have financial interests in the Merger that may be different from, or in addition to, those of Common Unitholders generally. The GP Board was aware of these interests and considered them, among other matters, in approving the Merger Agreement and making its recommendation that the Limited Partners approve the Merger Agreement.

Indemnification; Directors’ and Officers’ Insurance

All of the directors and executive officers of the GP Board will receive continued indemnification and insurance coverage for their actions as directors and executive officers for a period of six years after the Effective Time of the Merger.

Beneficial Ownership of Common Units

Certain of the directors and executive officers of the General Partner hold Common Units and will be entitled to receive the Merger Consideration in connection with the Merger. See “Unit Ownership of Certain Beneficial Owners, Directors and Executive Officers of the Shell Filing Parties” for more information.

Golden Parachute Compensation

No executive officer or director of the General Partner is entitled to or will receive any severance payments or “golden parachute compensation” in connection with the Merger.

Material U.S. Federal Income Tax Consequences of the Merger

For U.S. federal income tax purposes, the receipt of cash in exchange for Common Units pursuant to the Merger will be a taxable transaction to Common Unitholders. A Common Unitholder who receives cash in exchange for Common Units pursuant to the Merger will recognize gain or loss in an amount equal to the difference between:

 

•

the sum of (i) the amount of any cash received by the Common Unitholder and (ii) such Common Unitholder’s share of the Partnership’s nonrecourse liabilities immediately prior to the Merger; and

 

•

such Common Unitholder’s adjusted tax basis for Common Units (which includes such Common Unitholder’s share of the Partnership’s nonrecourse liabilities immediately prior to the Merger).

Except as noted in “Material U.S. Federal Income Tax Consequences of the Merger” below, gain or loss recognized by a Common Unitholder on the sale or exchange of a Common Unit will generally be taxable as capital gain or loss. However, a portion of this gain or loss, which could be substantial, will be separately

 

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computed and taxed as ordinary income or loss under Section 751 of the Code, to the extent attributable to assets giving rise to “unrealized receivables,” including depreciation recapture, or to substantially appreciated “inventory items” owned by the Partnership and its subsidiaries. Passive losses that were not deductible by a Common Unitholder in prior taxable periods because they exceeded such Common Unitholder’s share of the Partnership’s income may become available to offset a portion of the gain recognized by such Common Unitholder.

The U.S. federal income tax consequences of the Merger to a Common Unitholder will depend on such Common Unitholder’s own personal tax situation. Accordingly, the Partnership strongly urges you to consult your tax advisor for a full understanding of the particular tax consequences of the Merger to you.

See “Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of certain U.S. federal income tax consequences of the Merger.

Ownership of the Partnership After the Merger

After the Merger, the Partnership will survive as an indirect wholly owned subsidiary of Parent.

Regulatory Approvals and Clearances Required for the Merger

None of Parent, the General Partner or the Partnership is aware of any federal or state regulatory approval required in connection with the Merger, other than compliance with applicable federal securities laws and applicable Delaware law.

Financing of the Merger

The total amount of funds necessary for Parent to consummate the Merger and the related transactions, excluding expenses related thereto, is anticipated to be approximately $1.96 billion. Parent expects to fund the Merger with cash on hand. The Merger is not subject to any financing condition, and Parent does not expect any difficulties in obtaining the cash required to fund the Merger.

Fees and Expenses

Generally, all fees and expenses incurred in connection with the Merger will be the obligation of the respective party incurring such fees and expenses, except that (i) Parent and the Partnership will each pay one half of the expenses, other than the expenses of financial advisors or outside legal counsel, incurred in connection with the filing, printing and mailing of this information statement and the Schedule 13E-3, and any amendments or supplements hereto or thereto, (ii) Parent shall pay all costs and fees of the Paying Agent and all expenses associated with the exchange of the Public Common Units for the Merger Consideration and (iii) in the event of a material uncured breach, Parent or the Partnership, as the case may be, will be liable for up to $5.0 million in reimbursement of expenses, as discussed below under “The Merger Agreement—Effect of Termination; Termination Expenses.”

Total fees and expenses incurred or to be incurred by the Partnership in connection with the Merger are estimated at this time to be as follows:

 

		Amount to be Paid
Financial advisory fee and expenses		$
Legal, accounting and other professional fees		$
Printing and mailing costs and filing fees		$
Paying agent fees and expenses		$
Other fees and expenses		$
Total		$

 

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Parent and its affiliates (other than the General Partner and the Partnership) are expected to incur and pay fees and expenses of approximately $                million in connection with the Merger, consisting primarily of legal and financial advisory fees.

Certain Legal Matters

General

In the Merger Agreement, the parties have agreed to cooperate with each other to make all necessary, proper or advisable filings with any applicable governmental authorities and to obtain promptly all governmental approvals and consents necessary to consummate the Merger, subject to certain exceptions and limitations.

Certain Litigation

Currently, the Partnership is not aware of any pending litigation related to the Merger.

Provisions for Public Unitholders

No provision has been made to grant Public Unitholders access to the files of the Partnership, the General Partner, Parent, Holdings or Merger Sub or to obtain counsel or appraisal services at the expense of the foregoing parties.

Delisting and Deregistration of Common Units

If the Merger is completed, the Common Units will cease to be listed on the NYSE and will be deregistered under the Exchange Act.

No Appraisal Rights

Common Unitholders are not entitled to dissenters’ rights of appraisal under the Partnership Agreement, the Merger Agreement or applicable Delaware law.

Accounting Treatment of the Merger

The Merger will be accounted for in accordance with GAAP. Because Parent has a controlling financial interest in the Partnership before the Merger (through its indirect ownership of the General Partner and Holdings) and will retain the controlling financial interest in the Partnership after the Merger, changes in Parent’s ownership interest in the Partnership will be accounted for as an equity transaction. Accordingly, no gain or loss on the Merger will be recognized in Parent’s consolidated statements of earnings.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This information statement includes forward-looking statements. You can identify forward-looking statements by the words “anticipate,” “estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

The GP Board or management of the General Partner or Parent, as applicable, based the forward-looking statements on current expectations, estimates and projections about the Partnership and the industries in which the Partnership operates in general. You are cautioned that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties that cannot be predicted. In addition, many of these forward-looking statements were based on assumptions about future events that may prove to be inaccurate. Accordingly, the Partnership’s actual outcomes and results may differ materially from what is expressed in the forward-looking statements. Any differences could result from a variety of factors, including the following:

 

•

The inability to complete the Merger due to the failure to satisfy conditions to completion of the Merger, including the absence of any legal restraint or prohibition enjoining or otherwise prohibiting the consummation of the Merger or making the consummation of the Merger illegal.

 

•

Whether the Merger will be consummated in 2022 or at all.

 

•

The potential impact of the announcement or consummation of the Merger on relationships, including with employees, suppliers, customers and competitors.

 

•

The occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement.

 

•

Risks related to distraction of management of the General Partner from the Partnership’s ongoing business operations due to the time and effort such management must commit to the Merger.

 

•

The continued ability of Parent and the Partnership’s non-affiliate customers to satisfy their obligations under their commercial and other agreements.

 

•

The volume of crude oil, refined petroleum products and refinery gas the Partnership transports or stores and the prices that the Partnership can charge its customers.

 

•

The tariff rates with respect to volumes that the Partnership transports through its regulated assets, which rates are subject to review and possible adjustment imposed by federal and state regulators.

 

•

Changes in revenue the Partnership realizes under the loss allowance provisions of its fees and tariffs resulting from changes in underlying commodity prices.

 

•

The Partnership’s ability to renew or replace its third-party contract portfolio on comparable terms.

 

•

Fluctuations in the prices for crude oil, refined petroleum products and refinery gas, including fluctuations due to political or economic measures taken by various countries.

 

•

The level of production of refinery gas by refineries and demand by chemical sites.

 

•

The level of onshore and offshore (including deepwater) production and demand for crude oil by U.S. refiners.

 

•

Changes in global economic conditions and the effects of a global economic downturn on the business of Parent, the Partnership and the business of their respective suppliers, customers, business partners and credit lenders.

 

•

The ongoing COVID-19 pandemic and related governmental regulations and travel restrictions (including the Partnership’s vaccine mandate for offshore employees), and any resulting reduction in the global demand for oil and natural gas.

 

55

•

Liabilities associated with the risks and operational hazards inherent in transporting and/or storing crude oil, refined petroleum products and refinery gas.

 

•

Curtailment of operations or expansion projects due to unexpected leaks, spills or severe weather disruption, including disruptions caused by hurricanes; riots, strikes, lockouts or other industrial disturbances; or failure of information technology systems due to various causes, including unauthorized access or attack.

 

•

Costs or liabilities associated with federal, state and local laws and regulations, including those that may be implemented by the current U.S. presidential administration, relating to environmental protection and safety, including spills, releases and pipeline integrity.

 

•

Costs associated with compliance with evolving environmental laws and regulations on climate change.

 

•

Costs associated with compliance with safety regulations and system maintenance programs, including pipeline integrity management program testing and related repairs.

 

•

Changes in tax status or applicable tax laws.

 

•

Changes in the cost or availability of third-party vessels, pipelines, rail cars and other means of delivering and transporting crude oil, refined petroleum products and refinery gas.

 

•

Direct or indirect effects on the Partnership’s business resulting from actual or threatened terrorist incidents or acts of war, including the ongoing Russian invasion of Ukraine, its associated impacts on global commodity markets and the resulting political and economic sanctions on Russia.

 

•

The effect of releases from the U.S. Strategic Petroleum Reserve.

 

•

The factors generally described in Part I, Item 1A. Risk Factors of the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 and Part II, Item 1A. Risk Factors of the Partnership’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022, each of which are incorporated by reference into this information statement; all forward-looking statements included in this information statement are expressly qualified in their entirety by such factors and cautionary statements.

OTHER MATTERS

Householding of Materials

Some banks, brokers and other nominees may be participating in the practice of “householding” information statements and annual reports. This means that only one copy of this information statement may have been sent to multiple Common Unitholders in your household. If you would prefer to receive separate copies of this information statement either now or in the future, please contact your bank, broker or other nominee. Upon written or oral request to the Partnership, the Partnership will promptly provide a separate copy of this information statement. In addition, Common Unitholders sharing an address can request delivery of a single copy of this information statement if you are receiving multiple copies upon written or oral request to the Partnership at the address and telephone number stated above.

 

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THE MERGER AGREEMENT

This section of this information statement describes the material provisions of the Merger Agreement, but does not describe all of the terms of the Merger Agreement and may not contain all of the information about the Merger Agreement that is important to you. The following summary is qualified by reference to the complete text of the Merger Agreement, which is attached as Annex A to this information statement and incorporated by reference herein. You are urged to read the full text of the Merger Agreement because it is the legal document that governs the Merger.

The Merger Agreement and this summary of its terms have been included to provide you with information regarding the terms of the Merger Agreement, and this summary is qualified in its entirety by the terms and conditions of the Merger Agreement. It is not intended to provide any other factual information about Parent, the Partnership, the General Partner or their respective subsidiaries and affiliates. The Merger Agreement contains representations and warranties by each of the parties to the Merger Agreement, which were made only for purposes of the Merger Agreement and as of specified dates. The representations, warranties and covenants in the Merger Agreement were made solely for the benefit of the parties to the Merger Agreement, may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. You should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Parent, the Partnership, the General Partner or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Partnership’s public disclosures incorporated by reference in this information statement.

The Merger

Subject to the terms and conditions of the Merger Agreement and in accordance with Delaware law, at the Effective Time, Merger Sub, an indirect wholly owned subsidiary of Parent, will merge with and into the Partnership, with the Partnership continuing as the surviving entity and indirect wholly owned subsidiary of Parent, and each Public Common Unit issued and outstanding immediately prior to the Effective Time will be converted into the right to receive (i) $15.85 in cash, without interest, and (ii) any distribution in respect of the Common Units with a record date occurring prior to the Effective Time that may have been declared by the Partnership on the Common Units in accordance with the Merger Agreement and which remains unpaid at the Effective Time. Following the consummation of the Merger, Parent, as the parent of the General Partner and Holdings, will indirectly own all of the limited partner interests and the non-economic general partner interest in the Partnership.

At the Effective Time, (i) the limited liability company interests in Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into a number of Common Units in the Partnership as the surviving entity in the Merger equal to the number of Public Common Units converted into the right to receive Merger Consideration, (ii) (A) the non-economic general partner interest, (B) the Common Units held by Parent and its affiliates and (C) the Preferred Units, each as are issued and outstanding immediately prior to the Effective Time, will not be cancelled, will not be converted into, or entitle the holder thereof to receive, Merger Consideration and will remain outstanding as equity interests in the Partnership as the surviving entity in the Merger, and (iii) the books and records of the Partnership will be revised to reflect (A) the conversion and cancellation of all Public Common Units and the right to receive the Merger Consideration, (B) the conversion of the limited liability company interests in Merger Sub and that, immediately after the Effective Time, Holdings and SOPC West will be the only holders of Common Units and Limited Partners and (C) the continuation of the existence of the Partnership without dissolution.

 

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Effective Time; Closing

The Effective Time will occur at such time as Parent and the Partnership cause a certificate of merger to be duly filed with the Secretary of State of the State of Delaware or at such later date or time as may be agreed by Parent and the Partnership in writing and specified in the certificate of merger.

The Closing will take place on the third business day after the satisfaction or waiver of the conditions set forth in the Merger Agreement (other than conditions that by their nature are to be satisfied at the Closing but subject to the satisfaction or waiver of those conditions), or at such other place, date and time as Parent and the Partnership may agree.

Conditions to Completion of the Merger

The Partnership and Parent may not complete the Merger unless each of the following conditions is satisfied or waived:

 

•

the Written Consent shall not have been amended, modified, withdrawn, terminated or revoked;

 

•

the absence of any legal restraint or prohibition enjoining or otherwise prohibiting the consummation of the Merger or making the consummation of the Merger illegal; and

 

•

the mailing of this information statement to the Limited Partners at least 20 days prior to the Closing Date.

The obligations of Parent, Holdings and Merger Sub to effect the Merger are subject to the satisfaction or waiver of the following additional conditions:

 

•

the representations and warranties of the Partnership and the General Partner being true and correct, both when made and as of the Closing as though made on the Closing Date, unless otherwise specified, subject to certain materiality qualifications and, with respect to certain representations and warranties, unless the failure of such representations and warranties to be so true and correct does not have, and would not reasonably be expected to have, individually or in the aggregate, a Partnership Material Adverse Effect (as defined in the Merger Agreement);

 

•

the performance by the Partnership and the General Partner of their respective obligations under the Merger Agreement, subject to certain materiality qualifications; and

 

•

the receipt by Parent of an officer’s certificate signed on behalf of the Partnership and the General Partner by an executive officer of the General Partner certifying that the two preceding conditions have been satisfied.

The obligation of the Partnership to effect the Merger is subject to the satisfaction or waiver of the following additional conditions:

 

•

the representations and warranties of Parent, Holdings and Merger Sub being true and correct, both when made and as of the Closing as though made on the Closing Date, unless otherwise specified, subject to certain materiality qualifications and, with respect to certain representations and warranties, unless the failure of such representations and warranties to be so true and correct does not have, and would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect (as defined in the Merger Agreement);

 

•

the performance by Parent, Holdings and Merger Sub of their respective obligations under the Merger Agreement, subject to certain materiality qualifications; and

 

•

the receipt by the Partnership of an officer’s certificate signed on behalf of Parent by a duly authorized person of Parent certifying that the two preceding conditions have been satisfied.

 

58

For purposes of the Merger Agreement, the term “Material Adverse Effect” means, when used with respect to a person, any change, condition, circumstance, effect, event, development, state of facts or occurrence that, individually or in the aggregate, (x) has a material adverse effect on the business, operations, assets, liquidity, financial condition or results of operations of such person and its subsidiaries, taken as a whole, or (y) prevents or materially impedes a party’s ability to consummate the transactions contemplated by the Merger Agreement, including the Merger, on or before January 25, 2023; provided, however, that, with respect to clause (x), any adverse changes, conditions, circumstances, effects, events, developments, states of facts or occurrences arising out of, attributable to, resulting from or due to any of the following shall be disregarded in determining whether there has been a Material Adverse Effect: (i) changes, conditions, circumstances, effects, events, developments, states of facts or occurrences generally affecting the economy, the financial or capital markets or political, legislative or regulatory conditions or changes in the industries in which such person operates; (ii) the announcement or pendency of the Merger Agreement or the transactions contemplated by the Merger Agreement, including the initiation of litigation by any person with respect to the Merger Agreement and the transactions contemplated by the Merger Agreement, or, except specifically for purposes of determining whether there is a breach of the representations and warranties made by the applicable parties in the Merger Agreement relating to noncontravention by the parties and the satisfaction of the closing conditions set forth in the Merger Agreement with respect to such representations and warranties, the taking of any action expressly permitted or expressly contemplated by the Merger Agreement; (iii) any change in the market price or trading volume of the limited partner interests, shares of common stock or other equity securities of such person or the credit rating of such person (it being understood and agreed that the foregoing does not preclude any other party to the Merger Agreement from asserting that any facts or occurrences giving rise to or contributing to such change that are not otherwise excluded from the definition of Material Adverse Effect should be deemed to constitute, or be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect); (iv) acts of war, terrorism (including domestic terrorism) or other hostilities (or the escalation of the foregoing), whether or not pursuant to the declaration of a national emergency or war, natural disasters, pandemics (including COVID-19) or epidemics or other force majeure events not set forth in clause (v); (v) cyberterrorism, hacking, ransomware or any other electronic attack or sabotage; (vi) changes in any applicable Laws or regulations applicable to such person or applicable accounting regulations or principles or the interpretation thereof; (vii) any Proceedings commenced by or involving any current or former member, partner or stockholder of such person or any of its subsidiaries arising out of or related to the Merger Agreement or the transactions contemplated by the Merger Agreement; (viii) changes, effects, events or occurrences generally affecting the prices of oil, natural gas or other carbon-based sources of energy or power; (ix) any failure of a person to meet any internal or external projections, budgets, forecasts or estimates of revenues, earnings or other financial or operating metrics for any period (it being understood and agreed that the foregoing does not preclude any other party to the Merger Agreement from asserting that any facts or occurrences giving rise to or contributing to such failure that are not otherwise excluded from the definition of Material Adverse Effect should be deemed to constitute, or be taken into account in determining whether there has been, or would reasonably be expected to be, a Material Adverse Effect); (x) with respect to the Partnership, the General Partner and their respective subsidiaries, any changes, conditions, circumstances, effects, events, developments, states of facts or occurrences (A) to which Parent has consented or expressly waived or (B) which resulted from any action or inaction which Parent or any of its Affiliates expressly requested of the Partnership, the General Partner or any of their respective subsidiaries, regardless of whether such action or inaction is permitted or required by the terms of the Merger Agreement; and (xi) with respect to Parent only, any effect to the extent resulting from a change, condition, circumstance, effect, event, development, state of facts or occurrence that has a Material Adverse Effect on the Partnership and its subsidiaries; provided, however, that changes, conditions, circumstances, effects, events, developments, state of facts or occurrences referred to in clauses (i), (iv), (vi) and (viii) above shall be considered for purposes of determining whether there has been a Material Adverse Effect if and to the extent such changes, conditions, circumstances, effects, events, developments, states of facts or occurrences have had a disproportionate adverse effect on such person and its subsidiaries, taken as a whole, as compared to other companies of similar size operating in the industries and in the geographic markets in which such person and its subsidiaries operate (in which case, for the avoidance of doubt, only the incremental disproportionate adverse

 

59

effect on such person and its subsidiaries when compared to such other companies may be taken into account in determining whether a Material Adverse Effect has occurred).

The Merger Consideration

Each Public Common Unit issued and outstanding as of the Effective Time will be converted into, and will thereafter represent only, the right to receive (i) the Merger Consideration and (ii) any distribution in respect of the Common Units with a record date occurring prior to the Effective Time that may have been declared by the Partnership on the Common Units in accordance with the terms of the Merger Agreement and the Partnership Agreement and which remains unpaid at the Effective Time. As of the Effective Time, (i) the Public Common Units will no longer be outstanding and will automatically be cancelled and cease to exist and (ii) each Public Unitholder will cease to have rights with respect to the Public Common Units, except with respect to the right to receive the Merger Consideration and any distributions described above. The Merger Consideration is subject to adjustment pursuant to the terms of the Merger Agreement to reflect the effect of any unit distribution, subdivision, reclassification, recapitalization, split, split-up, combination, exchange of units or similar transaction and to provide the Public Unitholders the same economic effect as contemplated by the Merger Agreement prior to any such event.

All of the limited liability company interests in Merger Sub issued and outstanding immediately prior to the Effective Time will be converted into a number of Common Units in the Partnership as the surviving entity in the Merger equal to the number of Public Common Units converted into the right to receive Merger Consideration. The (i) non-economic general partner interest, (ii) the Common Units held by Parent and its affiliates and (iii) the Preferred Units, each as are issued and outstanding immediately prior to the Effective Time will not be cancelled, will not be converted into, or entitle the holder thereof to receive, Merger Consideration and will remain outstanding as equity interests in the Partnership as the surviving entity in the Merger.

Representations and Warranties

The Merger Agreement contains representations and warranties by Parent, Holdings and Merger Sub, on the one hand, and the Partnership and the General Partner, on the other hand.

These representations and warranties have been made solely for the benefit of the parties to the Merger Agreement and:

 

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may be intended not as statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

 

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have been qualified by certain public disclosures of the parties and disclosures that were made to the other party in connection with the negotiation of the Merger Agreement, which disclosures may not be reflected in the Merger Agreement; and

 

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may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors.

Accordingly, these representations and warranties should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this information statement and in the documents incorporated by reference into this information statement, which may include information that updates, modifies or qualifies the information set forth in the representations and warranties.

The representations and warranties made by the Partnership and the General Partner relate to, among other things:

 

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organization, standing and similar organizational matters;

 

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capital structure;

 

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due authorization of the Merger Agreement and the transactions contemplated thereby, including the Merger, absence of any conflicts with third parties created by such transactions and the voting requirements for such transactions;

 

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required consents and approvals of governmental entities in connection with the Merger;

 

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documents filed with the SEC;

 

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no undisclosed liabilities or obligations;

 

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maintenance of a system of internal controls;

 

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absence of changes or events since March 31, 2022;

 

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legal proceedings;

 

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compliance with applicable laws and the possession of certain permits;

 

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information supplied in connection with this information statement and the Schedule 13E-3;

 

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benefit plans and other employee matters;

 

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real property;

 

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environmental matters;

 

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regulatory matters;

 

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opinions of financial advisors;

 

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insurance;

 

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brokers and other advisors;

 

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the Investment Company Act of 1940, as amended;

 

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no other representations and warranties; and

 

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certain operational representations and warranties of the Partnership and the General Partner with respect to non-operated joint ventures of the Partnership, which are qualified by knowledge of the Partnership.

The representations and warranties made by Parent, Holdings and Merger Sub relate to, among other things:

 

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organization, standing and similar organizational matters;

 

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capital structure;

 

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due authorization of the Merger Agreement and the Proposed Transaction, absence of any conflicts with third parties created by such transactions and the voting requirements for such transactions;

 

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required consents and approvals of governmental entities in connection with the transactions contemplated by the Merger Agreement;

 

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available funds;

 

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legal proceedings;

 

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information supplied in connection with this information statement and the Schedule 13E-3;

 

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brokers and other advisors;

 

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ownership of Partnership interests; and

 

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no other representations and warranties.

 

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Conduct of Business Prior to Closing

Under the Merger Agreement, subject to certain exceptions, unless Parent consents in writing (which consent cannot be unreasonably withheld, conditioned or delayed), each of the Partnership and the General Partner has agreed, and will cause each of its respective subsidiaries, to (i) conduct its business in the ordinary course of business in all material respects; provided, that it shall not prohibit the Partnership and its subsidiaries from taking commercially reasonable actions outside of the ordinary course of business in response to (x) changes or developments resulting or arising from COVID-19 or (y) other changes or developments that would reasonably be expected to cause a reasonably prudent company similar to the Partnership to take commercially reasonable actions outside of the ordinary course of business, (ii) use commercially reasonable efforts to maintain and preserve intact its business organization and the goodwill of those having business relationships with it and to retain the services of its present officers and key employees, if any, (iii) use commercially reasonable efforts to keep in full force and effect all material permits and all material insurance policies maintained by the Partnership and its subsidiaries, other than changes to such policies made in the ordinary course of business, and (iv) use commercially reasonable efforts to comply in all material respects with all applicable laws and the requirements of certain material contracts of the Partnership; provided, that no action or inaction by the Partnership, the General Partner, or their respective subsidiaries with respect to the matters specifically addressed by any of the foregoing provisions shall be deemed a breach of this sentence unless such action would constitute a breach of such other foregoing provision. During the period from July 25, 2022, the date of the Merger Agreement, until the Effective Time, if permitted by applicable law and in accordance with the terms and conditions in the Partnership Agreement, the General Partner will cause the Partnership to declare and pay regular quarterly cash distributions to the holders of each of the Common Units and the Preferred Units, respectively, consistent with past practice; provided, that, in no event shall any regular quarterly cash distribution declared or paid by the Partnership to holders of the Common Units and the Preferred Units be less than $0.300 per Common Unit and $0.2363 per Preferred Unit, respectively.

Under the Merger Agreement, subject to certain exceptions, unless Parent consents in writing (which consent cannot be unreasonably withheld, conditioned or delayed), the Partnership and the General Partner, will not, and will not permit their respective subsidiaries to:

 

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amend the organizational documents (whether by merger, consolidation, conversion or otherwise) of any such entity in any manner that would reasonably be expected to prevent or in any material respect impede the ability of the parties to satisfy any of the conditions to or the consummation of the Merger;

 

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with respect to the Partnership only, declare, authorize, set aside or pay any distribution payable in cash, equity or property in respect of Common Units, other than regular quarterly cash distributions consistent with past practice;

 

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issue, sell, pledge, dispose of, grant, transfer, encumber, or authorize the issuance, sale, pledge, disposition, grant, transfer, lease, license, guarantee or encumbrance of, any equity securities of the Partnership or any of its subsidiaries, or securities convertible or exchangeable into or exercisable for any equity securities, or any options, warrants or other rights of any kind to acquire any equity securities or such convertible or exchangeable securities or interests;

 

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split, combine, divide, subdivide, reverse split, reclassify, recapitalize or effect any other similar transaction with respect to any such entity’s capital stock or other equity interests;

 

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adopt a plan or agreement of complete or partial liquidation, dissolution or restructuring or a plan or agreement of reorganization under any bankruptcy or similar law;

 

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waive, release, assign, settle or compromise any proceeding, including any state or federal regulatory proceeding seeking damages or injunction or other equitable relief, which waiver, release, assignment, settlement or compromise would reasonably be expected to have a Partnership Material Adverse Effect;

 

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(1) change its fiscal year or any material method of tax accounting, (2) make, change or revoke any material tax election (including any entity classification election under Treasury Regulations

 

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Section 301.7701-3), (3) settle or compromise any material liability for taxes or any audit, examination or other legal proceeding in respect of an amount of taxes, (4) file any material amended tax return, (5) enter into any tax allocation agreement, tax sharing agreement, tax indemnity agreement or closing agreement relating to any material tax, (6) surrender any right to claim a material tax refund, or (7) consent to any extension of waiver of the statute of limitations period applicable to any material tax claim or assessment;

 

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make any material changes in financial accounting methods, principles or practices (or change an annual accounting period), except insofar as may be required by a change in GAAP;

 

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engage in any activity or conduct its business in a manner that would cause less than 90% of the gross income of the Partnership for any calendar quarter since its formation and prior to the Effective Time to be treated as “qualifying income” within the meaning of Section 7704(d) of the Code;

 

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except as required by the terms of any benefit plan of the Partnership existing and in effect on the date of the Merger Agreement or as contemplated by the Merger Agreement, (1) establish, adopt, materially amend or modify, commence participation in or terminate (or commit to establish, adopt, materially amend or modify, commence participation in or terminate) any material benefit plan of the Partnership (or any plan or arrangement that would be a material benefit plan of the Partnership if in effect as of the date of the Merger Agreement), (2) materially increase in any manner the compensation, severance or benefits of any of the current or former directors, officers or employees of the Partnership, the General Partner or any of their respective subsidiaries, or enter into or amend any employment, severance, termination, retention or consulting agreement, in each case, other than in the ordinary course of business, (3) accelerate any material rights or benefits under any benefit plan of the Partnership, or (4) grant any awards issued under the Shell Midstream Partners GP LLC 2014 Long-Term Incentive Plan or other equity awards; or

 

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agree, in writing or otherwise, to take any of the foregoing actions, or take any action or agree, in writing or otherwise, to take any action that would reasonably be expected to prohibit, prevent or in any material respect hinder, impede or delay the ability of the parties to satisfy any of the conditions to or the completion of the Merger.

Agreement to Take Further Action and to Use Reasonable Best Efforts

Each of Parent, Holdings and Merger Sub, on the one hand, and the Partnership and the General Partner, on the other hand, will cooperate with the other and use and cause their respective subsidiaries to use their reasonable best efforts to (i) take, or cause to be taken, all appropriate actions, and do, or cause to be done, all things, necessary, proper or advisable to cause the conditions to the Closing of the Merger to be satisfied as promptly as reasonably practicable (and in any event not later than January 25, 2023), including, for the avoidance of doubt, in the case of Parent, Holdings and the General Partner, until the Effective Time or the termination of the Merger Agreement, retaining ownership and voting control, directly or indirectly, over all Common Units and Preferred Units and the General Partner’s interest in the Partnership beneficially owned by Parent, Holdings, any of their respective subsidiaries or the General Partner, as applicable, as of July 25, 2022, the date of the Merger Agreement, or acquired thereafter, and to consummate and make effective the Merger, including preparing and filing as promptly as practicable all documentation to effect all necessary filings, notifications, notices, petitions, statements, registrations, submissions of information, applications and other documents, (ii) promptly obtain (and in any event no later than January 25, 2023) all approvals, consents, waivers, clearances, expirations or terminations of waiting periods, registrations, permits, authorizations and other confirmations from any governmental authority or third party necessary, proper or advisable to complete the Merger, and (iii) defend any proceedings challenging the Merger Agreement or the consummation of the Merger or seek to have lifted or rescinded any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the Merger. Notwithstanding anything in the Merger Agreement to the contrary, no party nor its affiliates shall be obligated pursuant to the foregoing to offer or commit or consent to take or refrain from taking any action pursuant to any request or requirement of any governmental authority that

 

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